Morgans picks 18% lift in Synlait profit on growing formula sales
By Rebecca Howard
Sept. 9 (BusinessDesk) - Morgans expects Synlait Milk to report a 17.5 percent lift in full-year profit this week,
underpinned by strong growth in infant formula volumes, a bigger contribution from lactoferrin, and slightly larger
The forecast is largely driven by a 23 percent increase in canned infant formula volumes to 43,750 tonnes, Morgans'
analysts Kurt Gelsomino and Belinda Moore said in a note.
A2 Milk's 47 percent lift in formula sales and "the strong Lyttelton Port data suggests the company is on track to hit
the higher end of this range," they said. Total formula exports from Lyttelton to Australia, China and Hong Kong rose
38.4 percent for the 12 months to June 30, and 29.6 percent for the 12 months to July 31.
Synlait has forecast production of 41,000-45,000 tonnes of canned infant formula in the year to July 31.
Morgans also said Synlait has doubled its lactoferrin production capacity to around 36 tonnes and Synlait has forecast
production of around 27 tonnes in the year to July 31.
With pricing reportedly strengthening since the first half result, Morgans expects the second half gross profit margin
to be around $550,000 per tonne and FY19 lactoferrin gross profit of $12.2 million compared to $4.4 million in FY18.
"Lactoferrin comprises around 6 percent of our FY19 gross profit forecast and the favourable pricing environment is
providing an earnings tailwind," Morgans said.
It also forecasts 7 percent growth in Synlait's annual ingredient sales volumes.
Synlait is due to report on Thursday but has not provided earnings guidance. It said profitability is expected to
increase at a slower pace than the prior year's 89 percent jump to $74.6 million.
Morgans said it expects Synlait to provide guidance on infant formula sales volumes for the current financial year. The
research house forecasts 51,600 tonnes for the 2020 year, up 18 percent.
Morgans predicts Synlait will report a net profit of $104.5 million for the current financial year, up 19 percent,
rising to $126.7 million in the 2021 financial year.
The researchers lowered their price target for Synlait to A$9.60 from A$10.10, due to the weaker New Zealand dollar. The
stock recently traded at A$8.80 on the ASX and at $9.44 on the NZX.
"We remain attracted to Synlait's position as a leading manufacturer of value-added dairy products, its strong value
chain, positive leverage to A2 Milk’s infant formula growth in China, capacity to capitalise on a favourable lactoferrin
pricing environment and solid return on capital profile, particularly relative to other dairy peers," the analysts said.
They also expect an update on Pokeno's commissioning timeline after the company appealed the reinstatement of land
covenants on the site.
Synlait's February 2018 land purchase there was conditional on the seller, Stonehill Trustee, procuring the removal of
the covenants which restrict the site's use to grazing, lifestyle farming or forestry. A High Court decision in November
removed the covenants and then Synlait took the title of the land.
However, the owner of adjacent land, Ye Qing, won an appeal in the Court of Appeal in May which overturned the decision
to remove the covenants.
Synlait filed an application to appeal to the Supreme Court to have the decision overturned in June. A hearing has been
scheduled on Oct. 21 to consider whether leave for an appeal will be granted.
Synlait has reiterated that Pokeno’s timeline remains unchanged and that it expects to commission the plant in line with
its original target of late September.
It has also said it does not expect the current legal proceedings will impact the company’s ownership or future use of
the plant and believes the market has ‘overestimated’ the cost of any potential settlement.
However, "clearly, the issue is overhanging the stock and we continue to see a timely and cost-effective resolution as
an important catalyst to de-risk Synlait's growth outlook and support a re-rating," said Morgans.