Market looks to a2-linked Synlait for strong first half result

Leon Clement, chief executive of Synlait Milk. Photo/NZ Herald.

Canterbury-based dairy company Synlait Milk is expected to report a strong first-half result as it continues to ride on the coat-tails of its highly successful customer and part-owner, a2 Milk.

The fortunes of Synlait and marketing phenomenon a2 Milk are closely aligned, which is a blessing and a curse for both of them.

While retaining the relationship that has served them so well, they seek to become less reliant on each other. Before signing a joint venture deal with Fonterra last year, Synlait was a2 Milk's sole supplier in New Zealand.

And A2 Milk, which last year lifted its stake in Synlait by 8 per cent to 17.4 per cent, remains Synlait's biggest customer.

The issue for Synlait and a2 Milk has been what one analyst calls their "co-dependency".

"They need us and we need them. And to an extent, that has occurred because both organisations have been successful with each other and both organisations have in a transparent and open way, worked together to de-link that co-dependency," newly appointed chief executive Leon Clement told the Herald in an interview last December.

Forsyth Barr analyst Chelsea Leadbetter said she expected a strong first-half result from Synlait tomorrow, driven by volume growth from a2 Milk at healthy margins.

Leadbetter expects a net profit of about $47.5 million, a 17 pet cent improvement on the corresponding period a year earlier, driven by a near 20 per cent lift in revenue to $525.7m.

"Forecasting the interim results of dairy companies can be a bit messy, but here is no doubt that the a2 Milk story will be front and centre," she said.

Leadbetter said the key thing to look for would be how successful Synlait had been in finding new customers: "We are well aware that they are looking to diversify their business but it would be nice to see a few steps forward on that front." Analysts will also be looking for an update on where Synlait stands with its regulatory processes and some guidance on how much infant formula it is likely to make in the full year.

Synlait and a2 have enjoyed a stellar run on the share market. Over the last two years, Synlait's share price has rallied by 235 per cent and a2 Milk's by 383 per cent.

Dairy co-op Fonterra will also report its first-half result tomorrow, which will coincide with an update on its asset sales review.

Its New Zealand ice cream business, Tip Top, is for sale. The holding in China's Beingmate is also under review, as is a third, as yet unnamed, asset.

Fonterra said last month there would be no interim dividend and its dividend policy was under review.