Synlait’s share price has been under pressure, trading around $1.46 - down $2.31 or 61.3 per cent from last December’s peak - after a string of downgrades.
“It is trading at a significant discount to its [net tangible assets] so a capital raise can’t be ruled out, or even something more radical where a2 actually buys Synlait and offloads Mataura Valley Milk (MVM), which is a loss-making business,” said Devon Funds head of retail Greg Smith.
Synlait is a2 Milk’s sole supplier of infant formula and a2 Milk is Synlait’s biggest customer by far.
“A2 has got reasonably clear intentions around the investment that they are planning, or willing to make, taking control over the supply chain directly [through MVM],” he said.
“On a2′s part, it’s heavily reliant on Synlait Milk. It can’t sell its China-label infant formula without Synlait, because Synlait has the licence.
“It’s not like they [a2] can switch to another manufacturer,” he said.
“A2 has got a vested interest in seeing Synlait being in the best shape possible.
“A capital raising can’t be ruled out as an option.
“Even more radical would be an outright takeover.”
Forsyth Barr analyst Matt Montgomerie said Synlait’s share price was reflecting uncertainty.
“I pitch it as them being able to trade out of this elevated debt scenario as possible and plausible, but I certainly don’t think it’s without risk, and I think that’s what the share price is telling us at the present time,” he said.
“For them to trade out of it, we need to see a clear recovery in earnings or see a pathway to that outside of the full 2023 year.
“And then in the short term being able to get rid of or reduce the elevated inventory that they have on the balance sheet.”
Montgomerie said a straight-out takeover of Synlait by a cashed-up a2 Milk was not “top of mind” for the market but was not out of the question.
“A2 can’t do without Synlait and vice versa,” Montgomerie says.
“But I still think it’s plausible for them to trade out from here.
“Clearly they are mutually beneficial, with the mix of a2 business leaning more and more towards China-label infant formula - and their reliance or the need for Synlait only increases given the licence that it has over the Dunsandel sites,” Montgomerie said.
“I would certainly not rule it out, that would be my comment.”
Montgomerie did not think Synlait would sell assets to repay debt.
If and when it does come to a capital raise or a takeover, a2 certainly has the cash for it. At its half-year profit announcement, the company said it had $700.2m in cash on hand.
Synlait’s market capitalisation stands at $320m.
Together, a2 and China’s Bright Dairy own about 60 per cent of Synlait.
Synlait has $180m in bonds trading on the NZX, which roll off in 18 months.
The company last went to the market in November 2020, raising $200m.
Serko spikes
Shares in Serko spiked after the travel and expense management software company reported a 154 per cent lift in income for the March year.
Total income of $48m was just ahead of the revised 2023 guidance range of $42m to $47m. Average revenue per booking was $9.56, up 65 per cent.
The company’s net loss came to $30.5m, a 15 per cent improvement.
Underlying average monthly cash burn was $2.7 million.
Infratil due
Infrastructure investor Infratil reports its annual result on Monday.
Infratil held a comprehensive investor day at the end of the financial year where it provided guidance for its investments in CDC and One NZ - its two key holdings.
Since then, two other portfolio companies, Manawa and Wellington Airport, have also reported.
“This leaves limited uncertainty with regards to 2023 Ebitda deliveries,” Forsyth Barr said.
Infratil has narrowed its Ebitdaf guidance to $520m-$535m (previously $510m-$540m).
WasteCo’s buy
Newly listed WasteCo NZ has entered into a conditional agreement to purchase the assets and business of Cleanways, Enviro South and Wastech Services (Central Otago) for $7.35m.
Cleanways and Enviro South are based in Invercargill and specialise in bulk liquid waste, providing a range of services across Southland.
Wastech Services is based in Cromwell and specialises in the removal of bulk liquid and solid waste, providing services throughout the Central Otago region.
WasteCo said the purchase price will be partially satisfied by the issue of 31.85m new Wasteco shares to Cleanways shareholders ($2.2m).
The balance of the purchase price, $5.1m, will be payable in cash on settlement.
WasteCo debuted on the NZX last December in a reverse listing through the listed shell company Goodwood Capital.
Through its wholly owned subsidiaries, the company owns and operates a range of business activities associated with waste and refuse collection, recycling and disposal, street cleaning, and other industrial services in the South Island.
Its shares last traded at 7.6c.
Sanford half-year
Seafood company Sanford is due to report its first-half result on Monday.
In its most recent update, Sanford said there had been a notable strengthening of pricing in all divisions in its first quarter.
Sales volumes were down on the same quarter last year due to timing and availability of some catch, several one-off events in 2022 and the timing effect of Sanford’s marine extracts plant start-up.
The company said at the time that it was confident it would achieve expected sales volumes over the full year, subject to catch and harvest meeting expectations.
