Shares in Synlait (ASX: SM1) experienced double-digit (14%) drop in afternoon trading to $0.81 after the Kiwi dairy group warned of slower financial progress in 2H FY25.
Driven by stronger demand for its advanced nutrition products, improved commodity prices, and cost-cutting measures, revenue rose 16% to NZ$916.8 million. As a result, the company posted a net profit after tax of NZ$4.8 million for the half, a major turnaround on last year’s NZ$96.2 million loss.
However, today’s vote of no confidence, following a 1H FY25 group earnings lift of 200% to NZ$63.1 million, crystallises the market’s limited appetite for stocks brave enough to flag future headwinds.
The once-cash-strapped milk processor - which is 65.25% owned by China’s Bright Dairy - also ended the half with an improved net debt position of $391.9 million, down 29%.
Synlait is now targeting a closing net debt balance of $250 million to $300 million and a net senior debt-to-earnings ratio of below 2.5 times in 2025, which is expected to position the company well for bank refinancing in 2H FY25.
Given the position Synlait was in 12 months ago, acting CEO Tim Carter reminded investors that today’s announced return to profitability is a considerable commercial achievement.
However, in the next breath, Carter warned of slower 2H FY25 progress due to risks relating to milk stream returns and foreign exchange risks.
Future plans
The company’s newly appointed CEO, Richard Wyeth, will take up the role on the 19th of May.
Last year, Synlait, a major supplier of infant formula to a2 Milk (A2M), reported an annual loss of NZ$182.1 million. Much of the loss can be attributed to a NZ$114.6 million loss non-cash impairment of its long-term North Island assets, which include its processing plant at Pōkeno.
The forecast base milk price for 2024-25 is understood to be NZ$10/kg of milk solids, with additional premium payments available to suppliers without a “cease” notice, which happens when farmers give notice of withdrawing their milk supply.
Overall, the total forecast average milk payment for Synlait suppliers is NZ$10.48/kg.
“We are very comfortable with our forecast milk supply for the next financial year,” said Tim Carter.
“Progress made by our on-farm team means the majority of our South Island farmer suppliers are not under cease – a significant improvement from six months ago."
Synlait has a market cap of $500 million; the share price is up 23% over one year and up 115% year to date.
The stock appears to be in a strong bullish trend confirmed by multiple indicators.
Consensus is Moderate Sell.
