Stock Takes: Can cash-strapped Synlait find a buyer for Dairyworks?

Synlait Milk appears less confident that its Dairyworks business will sell.

Synlait Milk’s Pokeno site visit for institutional investors this week revealed little but offered a few clues about what might happen next for the cash-strapped dairy processor.

The company’s Dairyworks business is for sale. It said the process had been “challenging”, according to Forsyth Barr analyst Matt Montgomerie, who attended the event.

“They used the term ‘optimistic’ in terms of pricing from prospective buyers,” Montgomerie said.

“There was an evident change in language from only a few months ago when they sounded quite confident with respect to getting that asset sold,” he told Stock Takes.

The company has four options if the sale does not go ahead: raise more equity; sell other assets such as Pokeno or its Dunsandel facility; seek alternative debt arrangements; or bring in a strategic investor.

“The first and second - an equity raise or an asset sale - seem more likely to me than the other two,” Montgomerie said.

Market analysts have valued Dairyworks at around $150 million.

Synlait, at its site visit, talked of the opportunities for cream. “The investor day centred around advanced nutrition and alternatives to broaden the portfolio into adult nutrition, and within that trying to leverage their hybrid plant and dairy processing capacity at Pokeno with the idea of further diversifying the customer base and trying to take advantage of the potential halo effect from gaining [US company] Abbott as a customer,” Montgomerie said.

“There was also quite a focus on food service and cream opportunities which Fonterra has been very successful at in China and in the broader Asian market,” he said.

“Synlait is trying to repeat the Fonterra playbook - to try and get a slice of that pie, but it’s early days.”

The jewel in Synlait’s crown is its Dunsandel plant - which has the licence to make Chinese-label infant formula for its biggest customer and 20 per cent owner, a2Milk.

The company was hit hard by the Covid-19 pandemic, which took it into the red, but its debt woes arose from its desire to lessen its reliance on a2 Milk.

Synlait has expanded aggressively in recent years through acquisitions and by building extensive manufacturing facilities at Pokeno, at the end of Auckland’s Southern Motorway.

Late last month, the company announced that Simon Robertson had resigned as chairman and as an independent director. Independent director Paul McGilvary has been elected acting chairman until the position is permanently filled.

A2 Milk under pressure

A2 Milk has given notice that it wants to cancel the exclusive manufacturing and supply rights held by Synlait in respect of stages 1 to 3 of a2 Milk’s current infant milk formula products for sale in China, Australia and New Zealand.

Synlait has disputed the notice and the matter is now heading to arbitration.

A2 Milk’s share price has been under pressure due to the state of China’s economy, which remains relatively depressed. The stock trades at just over $4 after reaching a record of $21.51 in June 2020.

The long-awaited post-Covid lift in the Chinese birth rate has not materialised and a2 Milk, once one of New Zealand’s biggest companies by market capitalisation, has seen its share price fall back to be more in line with that of an average consumer staples company.

A2 Milk shareholders can expect an update on the current state of play at the annual meeting, due on November 16. Synlait’s AGM is due on December 1.

A2 Milk chief executive David Bortolussi. The company's share price has been under pressure lately.

Cashed-up a2

A2 Milk - which at balance date had $757.2 million in the bank - is investing heavily in its 75 per cent-owned processor, Mataura Valley Milk, to lessen its reliance on Synlait.

Meanwhile, Synlait clearly has plans to lessen its reliance on a2 Milk - its biggest customer.

On that score, Synlait had high hopes for its new customer, America’s Abbott, for which it will make soy-based products.

“It’s fair to say that the volumes and the projected volumes [from Abbott] - at least in the near term - appear lower than the market expected upon the initial signing of the contract,” Forbar’s Montgomerie said.

“But it provides a beachhead into a new segment for them, and it now becomes a matter of Synlait executing on the contract to try and drive increased volumes through time.”

Over the coming 18 months, Synlait Milk has to repay $130m of bank debt (by March 2024) and $180m of retail bonds (December 2024).

The March 2024 payment is likely to be contingent on the sale of Dairyworks.

It appears that the longer the Dairyworks sale process goes on, the greater the chance of a capital raise becomes.

Port of Tauranga downgraded

Research group Morningstar has downgraded its forecasts for Port of Tauranga after the company recorded a dismal first quarter.

Management provided guidance for net profit after tax of $95m to $107m in the 2024 financial year, down 14 per cent on last year at the midpoint.

“We were previously expecting ... Port of Tauranga to generate broadly flat earnings in fiscal 2024,” Morningstar said.

“We downgrade our fiscal 2024 net profit forecast by 13 per cent to $103m and pare back medium-term forecasts as well,” it said.

Morningstar also trimmed its fair value estimate by $4 to $5 per share.

“The port’s share price is down 35 per cent from the 2020 peak and yet is now only just fairly valued in our opinion, a testament to how carried away the bulls got.”

At the current price, the port company trades on a forecast 2024 price-earnings ratio of 34 and offers a 2.6 per cent dividend yield, fully imputed for New Zealand residents.

“While valuation metrics look aggressive, this seems about right to us considering the port’s good long-term prospects as it benefits from population and economic growth, while most competitors are held back by space constraints,” Morningstar said.

Forsyth Barr also downgraded Port of Tauranga to “underperform” from “neutral” following a weak first-quarter trading update.

“The volatility in freight flows has increased in recent periods as inventory levels across the supply chain normalise post-Covid, reflecting reduced end consumer demand. Moreover, competitive pressure from Port of Auckland and significant KiwiRail cost increases has partly eroded the competitive position of MetroPort,” it said.

“Given the recent lift in bond rates and a constrained volume outlook, valuation now looks stretched.”

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