Dairy head upbeat about upcoming float

By Alexander Speirs

Synlait's plant in Dunsandel, Canterbury.
Synlait's plant in Dunsandel, Canterbury.

An IPO was one of the goals Bright Dairy set out for Synlait Milk when it acquired its 51 per cent stake for $82 million in November 2010.

Bright Dairy & Food Co (to give the company its full name) is part of China's Bright Food conglomerate and listed on the Shanghai stock exchange.

"Through the IPO we believe it will bring more resources into the company to help it improve and develop faster over the next several years," says Ke Li, Bright Dairy's marketing whiz and current director of Synlait Milk, who will remain a director after the IPO.

"We strongly believe that after the IPO the performance of the company will benefit every shareholder."

The improvements are the primary driver behind the IPO, with Synlait seeking to fund growth initiatives as well as retire old debt to enable further access to new debt financing. The growth initiatives include a new spray dryer to increase capacity to supply milk powder, a new lactoferrin extraction and purification plant, an Ammix butter plant and an on-site blending and consumer packaging facility.

Following the IPO, Bright will remain Synlait's largest shareholder. But its stake will be reduced from 51 per cent down to between 37-41 per cent. Despite this, it has received a special dispensation from NZX rules, enabling Bright to consolidate its NZ earnings as long as it holds at least 37 per cent of shares. Bright has the right to appoint four of the eight Synlait directors, giving it the ability to appoint the managing director and wield authority over the NZ company's direction.

But Ke, interviewed at Bright's Shanghai HQ, says the Chinese company has resisted a heavy-handed approach. It has not installed any of its own staff into Synlait management. Directors are there to represent Bright at board level and Bright does not influence the business directly.

Escrow arrangements agreed to by Mitsui & Co, the second-largest shareholder in Synlait, will prohibit both them and Bright Dairy from selling their shares until at least the announcement of results for the 2014 financial year.

Synlait Milk chief executive Dr John Penno is understandably upbeat about the float. Penno and his fellow shareholders had to go back to the drawing boards after a 2009 capital-raising attempt failed. He believes more New Zealanders - and institutional shareholders - get the protein story now, and where dairy fits in.

The prospectus makes it clear Synlait is gearing up to take advantage of the surging demand for safe, high-quality infant formula in China. At this stage just over 90 per cent of Synlait Milk's earnings come from ingredients (specialised wholemilk and skim-milk powder) with just 8 per cent coming from nutritional products and infant formula.

Penno says much of the hype surrounding infant formula, including reports of product being smuggled into China, shows the market has gone "a bit crazy". "You have had this huge demand growth in China over the last five years as they have gone from 70 per cent local production to 70 per cent based on imports."

He points to urbanisation, which is taking place on a large scale and the pressure on Chinese mothers to rejoin the workforce soon after giving birth, often leaving grandparents to do the child-minding - hence the increased demand for formula. Children aged three to five often carry on drinking formulated milk products in preference to the domestic fresh milk supply.

Half of Synlait Milk's revenue comes from Asia and about half of that comes from China. Penno says China's role in making up 25 per cent of revenue is by design. "We don't want to become too China-centric."

However, Synlait Milk does lean more towards the emerging markets, such as North Africa and the Middle East. Penno says the focus is to build the infant formula business "as quickly as we can" over the next five years. The fresh capital from the IPO will go towards projects over the next three years worth a total of $183 million, which Penno says will also be funded by debt and operating earnings.

The offer documents point to a net profit of $10.84 million for the current year ending July 31, up from $9.31 million in 2012.

The documents point to a $19.67 million net profit for 2014.

Much of the projected increase in earnings will come from a lower interest bill resulting from proceeds of the IPO - down to a forecast $4.76 million in 2014 from $12.43 million in the current July year.

The company expects to list on the NZX on July 23.

Additional reporting APNZ

- NZ Herald

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