Synlait Milk has two businesses up for sale pay down debt.
Dairy and infant formula maker Synlait Milk says it plans to sell its Dairyworks and Talbot Forest Cheese businesses to pay down debt.
The Synlait board and management have been undertaking a strategy and “capital structure refresh”, which has included an asset review.
Debt-laden Synlait has seen its share price come under downward pressure this year, in part due to investor concern that it may require a capital raise to shore up its stretched balance sheet.
Forsyth Barr analyst Matt Montgomerie said the move was an “incremental step” forward for Synlait, which has issued a string of earnings downgrades in recent months.
The company’s shares last traded at $1.62, up 7c from Thursday’s close, but down from last December’s peak of $3.77.
“To ensure greater focus and execution of Synlait’s overall business strategy, the company intends to evaluate the divestment of Dairyworks and Talbot Forest Cheese,” Synlait said.
Synlait, which is a2 Milk’s sole supplier of infant formula, said it had a clear competitive advantage in its advanced nutrition and foodservice businesses.
The company also said it had a “disciplined and well-run” ingredients business.
The divestment of Dairyworks and Talbot Forest Cheese would enable Synlait to focus solely on growing the highest-margin segments of its value-add, business-to-business advanced nutrition and foodservice businesses.
The company said it had “world-class” capability and capacity in terms of its current asset bases and know-how at Dunsandel and Pokeno.
Synlait chief executive Grant Watson said Dairyworks - which was bought for $112 million in 2019 - was not core to Synlait’s strategy.
“Despite having extremely strong capability across consumer, brand, customer, and procurement, Dairyworks is not core to Synlait’s diversified growth strategy and does not leverage our core right to win competencies in advanced nutrition and food service.
“Synlait needs to focus on the business units where we have a clear right to win.
“Although the performance of Dairyworks has met expectations the intended divestment of Dairyworks, and Talbot Forest Cheese will enable us to help deliver against an increasingly focused strategy.”
Synlait has hired investment banking firm Jarden to advise on the sale.
Should a sale occur, the proceeds will be used to pay down debt, the company said.
At last year’s annual result, Synlait said it had taken a $12.2m impairment charge for its Temuka cheese plant - Talbot - “to reflect continued idling”.
Synlait paid $38m for the cheese maker.
Forsyth Barr’s Matt Montgomerie welcomed the move as being “incrementally positive” for Synlait.
“The risk has been elevated with Synlait and the potential proceeds will help to alleviate some of that risk,” he told the Herald.
“It’s important that they remove some risk, but the investment case for Synlait to get back to its former glory is separate to this, and reliant on some fundamental factors improving,” he said.
Not the least of those factors was registration approval from the Chinese regulator, SAMR, for its infant formula manufacture, which is expected to come through in the next month or so.
The company also has high hopes for its new, large South East Asian customer, for which it will make a plant-based product.
Synlait has pinned its hopes on the new client reducing its reliance on a2 Milk, which is by far its biggest customer.
Both Dairyworks and Talbot are based in South Canterbury.
Ironically, Dairyworks has been one of Synlait’s stronger performers.
It contributed $18m in ebit to the group last year, which was in line with expectations when Synlait bought it in 2019.
Montgomerie estimated Dairyworks to be worth $110m to $145m.
Both Dairyworrks and Talbot were acquired when former Fonterra executive Leon Clement was chief executive. Clement resigned in 2021.
Montgomerie said the sale could potentially reduce Synlait’s 2023 net debt to around $300m from around $425m.
“Gearing will remain elevated for some time but the potential proceeds helps alleviate balance sheet risk which we think will be taken incrementally positively by the market,” he said in a note.
A2 Milk owns about 20 per cent of Synlait, while China’s Bright Dairy has 39 per cent.