New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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Equity Bottom-Up

<h2>Synlait Milk</h2>
FY19&nbsp;Preview — Waiting on the Next Steps
We expect strong FY19 earnings growth from Synlait Milk (SML) on 12 September, driven by volume growth from key customer, The a2 Milk Company (ATM) at healthy margins. SML is growth-orientated, with no shortage of ideas to diversify and grow beyond infant formula (IF). Details remain sparse and progress is required to support expansion being made. We look for: any new customers, regulatory progress/insights and first time FY20 finished IF volume guidance.
Key areas of interest
<ul>
<li>Finished IF volumes: This is a key driver of earnings for SML, underpinned by its main customer, ATM, which continues to see strong demand for its IF products in China. Guidance for FY19 is 41,000–45,000 MT and our forecast is at the upper end (44,179 MT). First time guidance for FY20 will be a key area of focus.</li>
<li>Finished IF gross margin: An area of focus given the recent contract renewal with ATM. 1H19 provided some early insight, but full year results are likely to provide a better picture. We forecast meaningful margin erosion (c. -10%) given higher volume commitments with ATM and limited volumes from smaller customers; albeit expect margins remain attractive.</li>
<li>New customers: SML is in the midst of an expansionary capex phase with material capacity to fill. Customer/product mix leads to a wide range of feasible earnings outcomes. We look for any insights to help narrow this.</li>
<li>Any update on regulatory processes: Regulatory hurdles remain a barrier for SML’s finished IF customers (excluding ATM). Even if secured, it will likely take time for the brand(s) to re-build sales momentum.</li>
<li>Facility capacity — any update to published capacity: We see upside risk given progress being made with operating efficiencies at Dunsandel.</li>
<li>Any further insight on Pokeno:&nbsp;SML continues to reiterate the site is on track; however, legal issues need to be resolved. Processing was set to begin in September so any updated commentary on this is of focus.</li>
</ul>
Figure 1. FY19 result expectations
<table class="table table-striped">
<thead>
<tr>
<td>
NZ$m
</td>
<td>
FY18
</td>
<td>
FY19E
</td>
<td>
% chg
</td>
<td>
Consensus
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
Gross profit
</td>
<td>
166
</td>
<td>
192
</td>
<td>
15.4%
</td>
<td>
n/a
</td>
</tr>
<tr>
<td>
EBIT
</td>
<td>
113
</td>
<td>
130
</td>
<td>
15.3%
</td>
<td>
132
</td>
</tr>
<tr>
<td>
Underlying NPAT
</td>
<td>
75
</td>
<td>
88
</td>
<td>
18.5%
</td>
<td>
88
</td>
</tr>
<tr>
<td>
Underlying EPS (cps)
</td>
<td>
41.6
</td>
<td>
49.3
</td>
<td>
18.5%
</td>
<td>
49.0
</td>
</tr>
<tr>
<td>
Dividend (cps)
</td>
<td>
0.0
</td>
<td>
0.0
</td>
<td>
n/a
</td>
<td>
0.0
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis, Eikon
Conference call — 10am NZ time, Thursday 12 September
Dial in details are 0800 122 360 (NZ), 1800 760 146 (Australia). Conference ID:&nbsp;10001693. Pre-registration link:
<a href="https://s1.c-conf.com/diamondpass/synlaitmilkltd-10001693-invite.html" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://s1.c-conf.com/diamondpass/synlaitmilkltd-10001693-invite.html&amp;source=gmail&amp;ust=1568091073201000&amp;usg=AFQjCNGqfQHIcLyugGOJTUL_gLQLigxPzg" rel="noopener">https://s1.c-conf.com/diamondpass/synlaitmilkltd-10001693-invite.html</a>
<div class="content-highlight">
Investment View
SML is a growth-focussed niche dairy processor. Success to date has been underpinned by key customer, The a2 Milk Company, which we also expect to support strong near-term earnings growth. The long-term trajectory is less clear and we expect to see at least some reversion in returns, albeit the extent is unlikely to be known near-term. NEUTRAL.
</div>
Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262
Matt Dunn
matt.dunn@forsythbarr.co.nz
+64 9 368 0103

Synlait Milk
FY19&nbsp;Preview — Waiting on the Next Steps
We expect strong FY19 earnings growth from Synlait Milk (SML) on 12 September, driven by volume growth from key customer, The a2 Milk Company (ATM) at healthy margins. SML is growth-orientated, with no shortage of ideas to diversify and grow beyond infant formula (IF). Details remain sparse and progress is required to support expansion being made. We look for: any new customers, regulatory progress/insights and first time FY20 finished IF volume guidance.
Key areas of interest

Finished IF volumes: This is a key driver of earnings for SML, underpinned by its main customer, ATM, which continues to see strong demand for its IF products in China. Guidance for FY19 is 41,000–45,000 MT and our forecast is at the upper end (44,179 MT). First time guidance for FY20 will be a key area of focus.
Finished IF gross margin: An area of focus given the recent contract renewal with ATM. 1H19 provided some early insight, but full year results are likely to provide a better picture. We forecast meaningful margin erosion (c. -10%) given higher volume commitments with ATM and limited volumes from smaller customers; albeit expect margins remain attractive.
New customers: SML is in the midst of an expansionary capex phase with material capacity to fill. Customer/product mix leads to a wide range of feasible earnings outcomes. We look for any insights to help narrow this.
Any update on regulatory processes: Regulatory hurdles remain a barrier for SML’s finished IF customers (excluding ATM). Even if secured, it will likely take time for the brand(s) to re-build sales momentum.
Facility capacity — any update to published capacity: We see upside risk given progress being made with operating efficiencies at Dunsandel.
Any further insight on Pokeno:&nbsp;SML continues to reiterate the site is on track; however, legal issues need to be resolved. Processing was set to begin in September so any updated commentary on this is of focus.

Figure 1. FY19 result expectations




NZ$m


FY18


FY19E


% chg


Consensus






Gross profit


166


192


15.4%


n/a




EBIT


113


130


15.3%


132




Underlying NPAT


75


88


18.5%


88




Underlying EPS (cps)


41.6


49.3


18.5%


49.0




Dividend (cps)


0.0


0.0


n/a


0.0




Source: Forsyth Barr analysis, Eikon
Conference call — 10am NZ time, Thursday 12 September
Dial in details are 0800 122 360 (NZ), 1800 760 146 (Australia). Conference ID:&nbsp;10001693. Pre-registration link:
https://s1.c-conf.com/diamondpass/synlaitmilkltd-10001693-invite.html

Investment View
SML is a growth-focussed niche dairy processor. Success to date has been underpinned by key customer, The a2 Milk Company, which we also expect to support strong near-term earnings growth. The long-term trajectory is less clear and we expect to see at least some reversion in returns, albeit the extent is unlikely to be known near-term. NEUTRAL.

Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262
Matt Dunn
matt.dunn@forsythbarr.co.nz
+64 9 368 0103

Synlait Milk: FY19 Preview — Waiting on the Next Steps

New Zealand

Synlait Milk Ltd is a milk production company.  The Company produces, processes, markets and distributes milk, milk powder products and ingredients.

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Synlait Milk (SML NZ)

Synlait Milk: FY19 Preview — Waiting on the Next Steps

Synlait Milk FY19 Preview — Waiting on the Next Steps We expect strong FY19 earnings growth from Synlait Milk (SML) on 12 September, driven by...

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