Synlait is still recovering from a 2021 earnings slump. Photo / NZME
Dairy product and infant formula maker Synlait Milk looks to be still a work in progress after a disastrous 2021.
Synlait this week said there had been a "robust" return to profitability after a year of cost-cutting and building up its most profitable business segments.
The company reported a net profit of $38.5 million compared with a loss of $28.5m in the previous year, which was driven by a sharp drop in infant formula sales - much of it relating to the woes of its main customer and 20 per cent shareholder, a2 Milk.
Synlait said that by end of 2023 it would have completed its two-year recovery plan.
It intends to exit the 2023 full year and enter 2024 with a profitability level similar to what it experienced before things turned to custard in 2021.
Much will depend on what happens with a2 Milk and Synlait's other large, as yet unnamed, customer.
Harbour Asset Management senior analyst Oyvinn Rimer said it was a mixed result.
"Obviously they have come back from a pretty horrific 2021 but there is still a fair bit of work to be done and there is uncertainty with their two biggest customers," he said.
"It's yet to be seen as to what sort of golden egg this new customer will lay, but there is a lot of focus on them in terms of facilitating new plant, and getting blending and canning in Auckland ready for them.
"We have no idea as to what sort of future sales may come from them."
In slides accompanying the result, Synlait said it was aiming for an annual return on capital of 15 per cent.
Material from the previous results put the targeted return at 20 per cent.
"The new 15 per cent goal is probably more aligned with what the market was thinking, but it is an implied admission that the initial return on capital was probably a bit too high," Rimer said.
In the meantime, a2 Milk has Synlait and its majority-owned Mataura Valley Milk making its product.
A2 and Synlait are still very much joined at the hip in terms of infant formula for the Chinese market, but ultimately a2 will move more towards Mataura Valley for supply, Rimer said.
Broker Forsyth Barr said it was early in Synlait's turnaround but that its execution had been "solid" to date.
"However, at 12 times 12-month forward PE, Synlait is trading modestly below its five-year average which we believe appropriately reflects the challenging backdrop, ongoing uncertainties, lower returns profile relative to history and changing mix in the business," it said.
One of a2 Milk's peers - Bubs in Australia - has entered an agreement with Heilongjiang Ubeite Dairy Group for the manufacture and distribution of Bubs' Chinese-label goat milk infant formula products in the People's Republic.
Analysts have speculated that a2 Milk may at some point go down the same path as Bubs in having product made on the Chinese mainland.
For the moment, a2 Milk appears very much wedded to Synlait and Mataura Valley for infant formula manufacture.
Fonterra's recent result showed its inventory has built up substantially, but S&P Global Ratings doesn't seem to be too worried.
The ratings agency said Fonterra can absorb a recent surge in its inventory balance.
"We believe continued strong demand in the key operating markets, normalisation in shipping schedules, and a solid contracted rate for fiscal 2023 should help Fonterra to right-size its inventory balance," it said.
Fonterra's recent actions include managing its working capital position and gradually unwinding elevated inventories.
"We expect that, over the next 12 months, Fonterra should return to a more normal inventory balance."
Fonterra's inventory rose by about 32 per cent year-on-year to $5 billion as of July 31 this year.
The increase was due mainly to a combination of higher milk prices, late season milk production, shipping disruptions and Covid impacts.
The inventory build-up has driven debt levels higher, so Fonterra's debt-to-Ebitda ratio increased to 3.2 time, up from 2.7 times at the same time in the prior year.
This level is still well below the S&P Global Ratings adjusted downward ratings threshold of 4.0 times.
S&P said it expects Fonterra to remain disciplined in the deployment of capital.
"Measures may include, if required, revisiting the targeted $1 billion it plans to distribute to shareholders by 2024 following its decision to retain full ownership of its Australia business," the agency said.
The sharemarket's S&P/NZX 50 index has gained 2.3 per cent this quarter - its best performance in a year following three quarters of losses, according to Bloomberg.
The agency said there is optimism that as one of the first countries to kick off the current cycle of monetary tightening, New Zealand had already done the bulk of the heavy lifting to tame price increases.
"A competitive currency and the dominance of agriculture also are expected to make the economy more resilient and make local shares more attractive," Bloomberg said.
The Financial Markets Authority (FMA) said Catalist Markets had complied with its market operator obligations since launching in mid-2021.
The FMA published findings from its inaugural annual review of how well Catalist is meeting its licensed market operator obligations, covering June 21, 2021, to March 31, 2022.
The review said Catalist had suitable governance arrangements, technological capability and processes and policies.
Catalist operates Catalist Public Market, a "stepping stone" market aimed at small and medium-sized businesses seeking liquidity or aiming to raise capital of up to $20m, with a view that once these entities reach a certain scale, they would transition to the next phase of growth, which may be listing on the NZX.
It was designed to fill a funding gap for smaller companies by providing a lower-cost and simplified financial products market, offering trading by way of an online auction platform with periodic (rather than continuous) trading and disclosure.
Share trading platform Sharesies said its "auto-invest" facility is now available for exchange-traded funds (ETFs) on US exchanges.
Previously, Kiwis could set up scheduled investments for their NZX managed funds or ETFs only.
The new feature also allows investors to set up auto-invest with companies and ETFs from the three US exchanges—Nasdaq, the New York Stock Exchange, and Chicago Board Options Exchange.
"These added capabilities are intended to give Kiwis more options to grow their wealth by making regular investing easier, the feature will support dollar-cost averaging and help foster positive financial behaviours amongst investors," the company said.
ACC said it was shifting almost its entire holding of listed equities to low-carbon benchmarks, helping ensure the investment fund remains on track to reach emissions-reduction targets.
The changes cover about $15b of equity investments across ACC's global, Australian and New Zealand portfolios, and "reflect our commitment to the Paris Agreement, the Crown Responsible Investment Framework, and New Zealand's zero carbon legislation."
Todd McClay, Wayne Langford, Hamish Marr, Dr Jacqueline Rowarth, and Chris Russell.