Capital raise looms for Synlait as Dairyworks sale stalls

Synlait Milk has had a challenging year. Photo / File

A capital raise for cash-strapped Synlait Milk is looming after the company said the sale of its Dairyworks business was looking less likely.

The company said it was considering several options to deleverage its balance sheet, with a view to narrowing those options in the first quarter of 2024.

“Synlait remains in discussions with potential purchasers (of Dairyworks), but a sale cannot at this time be assured,” Synlait said in an update.

The dairy and infant formula maker, which has a $130 million debt repayment due by March 28 next year, said it had been a “challenging” year and that it was working to reset the business.

Synlait said it was engaging with its banking syndicate about a deleveraging plan and was working to significantly reduce debt levels, including $180m in NZX-listed bonds.

The bonds, which fall due on December 17, 2024, last traded at a yield of 19.90 per cent.

Analysts said that even though Synlait was under pressure, it was not likely to sell the profitable Dairyworks at a knocked-down price.

Synlait has extensive manufacturing assets at Dunsandel, in Canterbury, and at Pokeno, at the end of Auckland’s Southern Motorway.

Forsyth Barr analyst Matt Montgomerie, who has suggested that Synlait could sell Dunsandel to resolve its debt woes, said a capital raise was starting to look more likely as the March debt repayment deadline loomed.

“The key thing out of this update is the balance sheet challenges are persisting,” he said.

“Their debt levels remain elevated, as they have previously alluded to.”

Synlait has in the past said that it would not sell Dairyworks - which makes a healthy profit - at a discount.

The company’s “challenging” comment raised the possibility that it could go into the red in the first half to January 31, which would further work against any meaningful repayment of debt, Montgomerie said.

“Our view remains that if Dairyworks can’t be sold for a decent price then something has to give, be it an equity raise or other asset sales,” he said.

“As each day passes, either or both these scenarios appear more likely,” he said.

“My view is that an equity raise could be more likely than Synlait looking to sell Dunsandel, but it is a plausible scenario.

“They would be able to fetch a reasonable price for the asset, and it would completely resolve all balance sheet issues, at least for now.

“It would give them the chance to utilise Pokeno, while holding on to Dairyworks, which has been performing quite well for them.”

Synlait’s biggest shareholders are China’s Bright Dairy (39 per cent) and A2 Milk, about 20 per cent.

A2 Milk and Synlait are in dispute over an exclusivity agreement. Photo / File

At last count, a2 Milk had no debt and $707.2m in the bank - enough to buy Synlait (market cap $203m) three times over.

Synlait said it was continuing to receive “steadfast” support from Bright Dairy.

“Bright Dairy is the third-largest player in China’s dairy industry and views its investment in Synlait as a vital gateway to resources and capabilities in advanced dairy-related nutrition,” Synlait said.

Earnings woes and the likelihood of a capital raise have weighed heavily on Synlait’s share price, which has dropped 75 per cent over the last 12 months.

The stock has also fared badly after recently dropping out of the S&P/NZX50 index following a rebalancing.

Synlait expects its half-year net profit after tax to be down compared to the corresponding period in 2023, mainly due to increased financing costs and changes in margin.

In the half year to January 2023, the company’s profit came to $4.8m.

Synlait is a2 Milk’s sole supplier of infant milk formula, which it sells mostly to the lucrative Chinese market. A2 Milk is Synlait’s biggest customer.

Montgomerie said a2 Milk appeared to be putting more pressure on Synlait.

Synlait is involved in a confidential binding arbitration process with a2 Milk to determine the validity of a2′s notice of cancellation of the exclusivity arrangements under the Nutritional Powders Manufacturing and Supply Agreement (NPMSA) for a2 “Platinum” and other nutritional products.

In today’s update, Synlait said it had received notice of possible further claims from a2 Milk related to the pair’s manufacturing and supply agreement.

“Synlait remains of the view that together both companies stand the best chance of weathering the China market dynamics,” it said.

In a separate statement, a2 Milk said the disputed matters would not impact on the company’s 2024 earnings guidance.

The company’s first half result is due on February 19.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.

.