Synlait Milk says net profit will halve in 2021

Synlait Milk expects it full year profit to halve due to A2 Milk's problems with the Daigou trading channel. Photo ./ NZ Herald

Synlait Milk's share price fell sharply after the company said the problems of its biggest customer, a2 Milk, would mean that its net profit in the 2021 financial year will be about half that of the previous year.

The stock fell at one point fell as low as $4.50 on the news before staging a big comeback, ending steady at $4.85.

Likewise a2 Milk recovered to be just six cents down at $10.94 after hitting $10.46 earlier in the session.

A2 Milk, a strategic customer and cornerstone shareholder of Synlait, with just under 20 per cent, said last week its sales would be affected by Covid-19 disruption of the important daigou trading channel in Australia.

Synlait now expects total consumer-packaged infant formula volumes to be about 35 per cent lower than in 2020.

"As a result of this change, initial estimates, on currently available information, indicate that the overall FY21 NPAT result will be approximately half that of the 2020 net profit after tax," Synlait said.

Infant formula maker Synlait Milk said in September that its annual net profit dropped by 9 per cent to $75.2 million, reflecting the impact of new acquisitions made over the past two years.

The Canterbury-based company last year bought Dairyworks for $112m, in line with its move into "everyday dairy" products and complementing its acquisition of cheese-maker Talbot Forest.

The company said today it would update the market on is performance at its 2021 half-year result on March 29 or as material information becomes available.

Synlait has in recent years been actively trying to diversify itself away from a2 Milk.

"Synlait's board and management continue to actively pursue opportunities to mitigate the impact of this development that include focusing on the execution of its diversification strategy, asset optimisation and prudently managing costs," the company said.

There has been no disruption to manufacturing or demand for Synlait's ingredient, lactoferrin, or consumer-goods businesses, and Synlait remains confident that it can deliver on its medium- to long-term objectives.

"This updated guidance announcement reflects the impact that Covid-19 has had on Synlait's strategic customer," Synlait said.

"It also remains subject to the ongoing effects of Covid-19, with consumer behaviour, channel dynamics and supply chain disruptions all subject to change," the company said.

A2 Milk said last week that it expects its first-half revenue to be in the order of $670m and group earnings before interest, tax, depreciation and amortisation (ebitda) margin to be around 27 per cent.

It now expects full-year 2021 revenue to come to $1.4 billion to $1.55b and group ebitda margin of between 26 per cent and 29 per cent.

At the end of September, a2 Milk had forecast revenue for the first half of $725m to $775m.

Revenue for the year then was forecast at $1.8b to $1.9b, with an ebitda margin of 31 per cent.

A2 said in a statement the effect of the disruption in the daigou channel, which represents a significant proportion of its infant nutrition sales in the company's Australia and New Zealand businesses, had proved to be more significant and protracted than previously thought.

A2 Milk's market cap dropped by more than $2b on the back of the announcement. Synlait was also weak before it went into an NZX-sanctioned trading halt.