Synlait throws out earnings forecast due to Covid disruption

Synlait has thrown its earnings forecast due to uncertainty over Covid-19. Photo / Herald

Synlait Milk said it had withdrawn its earnings guidance for the 2021 year because it was continuing to experience "significant uncertainty and volatility" within its business.

The specialised infant formula maker said in December that an updated forecast from its biggest customer and 20 per cent owner, a2 Milk, meant that it expected total consumer-packaged infant formula volumes to be about 35 per cent lower than in 2020.

At the time, Synlait said that as a result, its profit would be about half that of the previous year's.

In response, the company's shares dropped by 39c or 10 per cent to $3.46.

In today's statement, Synlait said that that revised guidance would not now be attainable.

A2 Milk last month reported a 35 per cent drop in its net profit dropped by 35 per cent to $120 million in the six months to December due to Covid-19 disruption in the unofficial "daigou" trade - mostly out of Australia - into China, and the flow-on impact of that on cross-border e-commerce (CBEC) channels.

Ominously for Synlait, A2 Milk's infant formula inventory at the end of the six months came to $198.6m, $51.2m higher than at the end of 2020, mostly arising from the uncertainties and complexities of Covid-19 and its impact on supply chains.

Synlait's last guidance in December followed receipt of a revised demand forecast from a2 Milk.

Since then, several new factors have emerged which were expected to hit earnings in 2021.

They were:

• Ongoing uncertainty of a2 Milk's expected demand for the remainder of 2021 and 2022, as it continues to rebalance inventory levels, and recovers from the impacts of Covid-19 on the daigou and cross border e-commerce channels.

• The resulting impact of the above on Synlait's manufacturing recoveries, which sees infant formula base powder production dropping significantly as outputs and inventory levels reset to a new outlook.

• The impact of global shipping delays which is expected to continue for some time and may still further impact the 2021 result.

• The ongoing volatility in commodity prices.

"Given the significant volatility and uncertainty that is affecting Synlait at this time due to the above factors, the company's board and management see a broad range of outcomes still possible in 2021," Synlait said.

"However, the company's previous guidance, that the overall 2021 net profit will be approximately half that of the 2020 net profit after tax, will now not be attainable," the company said.

A further update would be provided at the company's half-year result on March 29.

Synlait's shares last traded at $3.85, having dropped by 30.6 per cent over the last 12 months.