Synlait almost doubles annual profit on sharp lift in formula sales

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

A huge lift in infant formula sales has allowed Synlait Milk to almost double its annual net profit, but the Canterbury-based milk processor has warned that the same kind of earnings growth is unlikely in the year ahead.

The company, which supplies 16 per cent shareholder A2 Milk, reported an after tax profit of $74.6 million for the year to July 31, up from $39.5 million in the previous year, and against the backdrop of a big increase in investment.

Last November, Synlait completed its second "wetmix" kitchen at Dunsandel, and the same month commissioned its Auckland blending and consumer packaging facility, both of which allowed the company to increase its finished infant formula capacity, chairman Graeme Milne said.

The growth in earnings came mostly from an 89 per cent increase in consumer packaged infant formula sales, which went from 18,776 tonnes in 2017 to 35,580 tonnes in 2018.

For the year ahead, Synlait - one of the market's strongest performers over the last year - has forecast infant formula sales of 41,000 to 45,000 tonnes.

"We are looking forward to continued growth of our profitability, although perhaps not quite at he same rate as we have seen in 2018," chief executive Leon Clement said in a conference call.

Clement said the formula sales forecast assumed that it would continue to grow its volumes with a2 Milk. He expected to see growth from the Bright and New Hope brands and added the outlook for Munchkin Grass Fed brands was encouraging.

Synlait's net debt increased by $32.3 million to $114.9 million - $103.8 million of which was spent on growth projects.

Despite the lift in expenditure, the company's balance sheet remained strong and well equipped to fund further growth.

Synlait also announced that it had entered into a conditional agreement to acquire selected assets from Canterbury's Talbot Forest Cheese for up to $40m.

This included property, plant and equipment at a new 12,000 tonne Temuka site, the consumer cheese brand and customer relationships.

Following in Fonterra's footsteps, Synlait cut its forecast milk price for the 2018/19 to $6.75 kg from a previous forecast of $7.00/kg.

Synlait bought 28 hectares of land at Pokeno in February and started building a new infant formula-capable, $280 million manufacturing facility shortly after.

The Pokeno plant is scheduled to open for the 2019/20 milk season, Clement said.

Synlait has been working to secure product registration in China for New Hope's Akara and Bright Dairy's Pure Canterbury brands. Both applications have been lodged with China's State Administration for Market Regulation and it is expected these will be granted "in due course".

The Munchkin Grass Fed infant formula registration is also currently progressing through the regulatory process with the U.S. Food and Drug Administration.

Despite the strong earnings numbers, Synlait's share priced dropped sharply - at one point hitting $11.50, down from Monday's closing price of $12.71.

By the close, the stock had recovered some ground to finish at $11.94, down 84 c or 6.6 per cent. Analysts said the was adjusting back after a very strong run.

Josh Wilson, portfolio manager at NZ Funds, said Synlait remained on a strong growth path but unlike its closely ally, A2 Milk, the company was having to make heavy capital investments to drive its growth.

The acquisition of Talbot was another step towards diversifying exposure away from A2 Milk, and infant formula generally.

Shareclarity managing director Daniel Kieser said the long term challenge for Synlait would be in building a brand.

"How Synlait will build - or buy - its brand is something investors will want to watch over the coming years," Kieser said.