Synlait last week announced a refinancing with a new-look banking syndicate, but it still has an up-front payment of $130m to make in March next year.
Then there is the $180m of bonds that fall due in December 2024.
Synlait has DairyWorks up for sale and analysts have estimated the company - a standout performer for the year - to be worth up to $150m.
In today’s result, DairyWorks was estimated to have contributed about $20m in ebitda to Synlait.
Synlait has been trying to become less reliant on its biggest customer, infant formula maker a2 Milk, while a2 Milk has invested heavily in its own manufacturing supply chain through its 75 per cent-owned Mataura Valley Milk.
While a formal announcement as to the identity of Synlait’s much-vaunted new customer - signed up to help offset a2′s influence - has yet to be made, America’s Abbott was referred to in today’s conference call.
In a conference call, chief executive Grant Watson was pressed on the likelihood of a capital raise, should a sale of DairyWorks not go ahead.
“There a range of options that we could pursue in the event that the DairyWorks business does not sell, including a capital raising,” he said.
Synlait had said in April it was not considering an equity capital raising as part of its capital strategy review.
In material released with its result, Synlait said it was likely to refinance its subordinated bond in part or wholly with senior bank debt, but would continue to explore options before a final decision is made.
“To ensure successful refinance of the bond in December 2024, Synlait is working towards deleveraging by divesting Dairyworks, managing working capital efficiently, increasing profitability and reducing capital expenditure,” it said.
Synlait bought Dairyworks, a cheese manufacturer with the Alpine, DairyWorks, and Rolling Meadow brands, in 2020.
In its result, the company said its balance sheet deteriorated in 2023 with net debt to ebitda ratio worsening to 4.6 times.
This year, Synlait is targeting a net debt to ebitda ratio of below 3.5 times through the sale of DairyWorks and improved profitability.
The target debt level assumes a six-month earnings contribution from DairyWorks and that the sale is completed during the year.
“Synlait anticipates that net debt will reduce significantly in 2024 as DairyWorks is sold and operating cash flows improve,” the company said.
The company, which has extensive and near-new assets at Pokeno, said it has its plant-based capability fully ratified, allowing it to produce non-dairy and dairy/non-dairy hybrid nutrition products.
All three Synlait manufacturing sites (Dunsandel, Pokeno and Auckland) were audited by the US Food and Drug Administration and received positive outcomes.
Watson said on the conference call that Synlait was talking to a number of interested parties for DairyWorks.
“At this stage we can’t confirm time frames,” he said.
Asked how confident he was of repaying the debt without divesting the asset, Watson said: “We are working through that with our financial advisers.
“There are a range of ways that we could use to shore up our balance sheet in the event that we did not sell DairyWorks,” he said.
In response to a question, Watson said Synlait’s 40 per cent owner, China’s Bright Dairy, had been “extremely supportive whether it was concerning banking relationships, Chinese regulatory matters and when it came to acquiring customers.
A2 Milk, has a 20 per cent shareholding in Synlait, has given notice that it wants to end the exclusivity arrangement it has with the company.
Synlait said it disputed the company’s right to cancel the exclusivity arrangements.
The apparent rift between the two is not expected to affect either party’s operations or profitability in the near future.
In its result, Synlait said 2023 was “highly challenging”, with material reductions in customer demand, CO2 shortages, extreme weather, Covid-19 pandemic, inflation, ongoing investments in new product workstreams, and the launch and stabilisation of the company’s new enterprise resource planning (ERP) system.
“Looking ahead to the 2024 financial year, Synlait could still face challenging China market dynamics, softening global conditions more generally, and continued inflationary pressures across its cost base, which could impact future customer demand and the company’s overall profitability,” it said.
Forsyth Barr analyst Matt Montgomerie said the result, at an operational level, was “slightly disappointing” - the key items being the nutritionals business and the ingredients margins.
“There is a lot of water to go under the bridge but if DairyWorks is not sold then the risks are quite elevated,” he said.
“It’s difficult to rule out a capital raising unless you sell DairyWorks and the clock is somewhat ticking, given there is the debt repayment due,” he said.
“The market needs to see execution, first and foremost, to get confidence in the outlook.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
