New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

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

Edgware Insights Pty Ltd

Wayne Murray

Independent Insight Provider

Edgware remains confident in the strong operating leverage and high gross margins of A2M, despite the dampening of the milk powder opportunity. The increasing demand from China for quality food, sourced globally is a permanent shift not a short-term phenomenon. Groups like A2M have a simple and powerful brand to meet this need across multiple dairy categories. The differentiated a2 product resonates with Chinese consumers.  Much of the earnings in three and five years will be driven by products not sold today, but which will be familiar and have limited commercial risk.We have been focused on a few obscure negatives around milk powder which initially distracted us from the hugely positive infant formula clarity. The regulatory changes to date are far more supportive than we had modeled in our infant formula earnings. We will not change our infant formula forecasts until will see the final AQSIQ food safety and labeling regulations, but expect a positive bias which could offset more than half of the milk powder lost earnings. We reduce our A2M milk powder revenue significantly as we feel regulations disadvantage commodity products repackaged for consumers.

Edgware remains confident in the strong operating leverage and high gross margins of A2M, despite the dampening of the milk powder opportunity. The increasing demand from China for quality food, sourced globally is a permanent shift not a short-term phenomenon. Groups like A2M have a simple and powerful brand to meet this need across multiple dairy categories. The differentiated a2 product resonates with Chinese consumers.  Much of the earnings in three and five years will be driven by products not sold today, but which will be familiar and have limited commercial risk.We have been focused on a few obscure negatives around milk powder which initially distracted us from the hugely positive infant formula clarity. The regulatory changes to date are far more supportive than we had modeled in our infant formula earnings. We will not change our infant formula forecasts until will see the final AQSIQ food safety and labeling regulations, but expect a positive bias which could offset more than half of the milk powder lost earnings. We reduce our A2M milk powder revenue significantly as we feel regulations disadvantage commodity products repackaged for consumers.

Dairy: Infant Formula Regulatory Clouds Clearing (Shame About Milk Powder).

New Zealand

Seeka Limited operates as a produce company. The Company produces apricots, cherries, pears, plums, bananas, papaya, kiwiberries, pineapples, kiwifruits, and avocado. Seeka offers professional orchard management services to kiwifruit growers.

Allied Farmers Limited is a New Zealand regional rural servicing company.  The Company offers its clients access to a range rural services including merchandising and bulk farm supplies, advice and trading in livestock, crop advice, wool storage and handling facilities, financial services and specialized regional real estate services.

New Zealand Coastal Seafoods Limited provides and distributes marine products. The Company offers various types of seafood. New Zealand Coastal Seafoods serves customers in New Zealand.

Good Spirits Hospitality Limited operates as an investment company. The Company offers sustainable cash flows, organic growth, and acquisition services. Good Spirits Hospitality serves customers in New Zealand.

New Zealand King Salmon Investments Limited provides fish farming services. The Company produces, grows, and sells salmons products. New Zealand King Salmon Investments serves customers worldwide.

PGG Wrightson Limited is a farm service organization on the South Island, operating in Otago and parts of Southland. The Company's operations include wool scouring and dumping, wool and livestock trading, farming financial services, residential real estate and retail farming merchandising, which includes animal health and nutrition and pasture improvements.

Livestock Improvement Corporation Limited provides herd improvement services to farmers in New Zealand.  The services provided by the Company include herd testing, animal health management, on farm consultancy, progeny testing, DNA analysis, artificial breeding and research and development.

T&G Global Limited is a domestic and international fruit and produce wholesale company. The Company wholesales fruits, vegetables and fresh flowers. The Company also manufactures fruit and vegetable products like juices and other ingredients for the food and beverage industry.

Fonterra Cooperative Group Ltd is a New Zealand multinational dairy co-operative and its farmer shareholders are the suppliers of milk to Fonterra in New Zealand. The Company operates Fonterra Shareholders' Fund, which provides additional financial flexibility for farmer shareholders who would have the opportunity to sell economic rights of shares to the fund.

Sanford Limited owns and manages deepwater and inshore fisheries throughout New Zealand waters.  The Company also operates cool-storage, ship-building, engineering and aquaculture businesses.  The Company exports seafood throughout the world.  The Company's seafood products include orange roughy, squid, hoki, tuna, mussels and salmon.

Honworld Group Limited manufactures and sells cooking wine. The Company offers a mixture of naturally-brewed yellow rice wine and naturally-brewed cooking wine.

Foodwell Corporation processes agricultural products such as peeled chestnuts and produces strawberry syrups.  The Company also manufactures jam, juice, frozen fruits, and canned fruits.

Riverview Rubber Estates Berhad cultivates rubber and oil palm in Malaysia.

Seoul Food Industrial Co., Ltd. produces bakery goods and snacks.  The Company also manufactures animal feedstuff and food waste disposal system.

TS Flour Mill Public Company Limited operates as a flour milling company. The Company produces noodle, bread, biscuit, cake, dough stick, and steamed bun flour. TS Flour Mill serves customers in Thailand.

McLeod Russel India Ltd.  cultivates, manufactures, and markets tea. The Group owns tea estates in Assam and Dooars.

Besunyen Holdings Company Ltd. processes and markets tea.  The Company produces both traditional and herbal teas.

NICHIWA SANGYO CO., LTD. produces mixed feed with poultry feed as its main product line.  The Company also raises livestock for the purpose of bioengineering research.

Global Palm Resources Holdings Limited is an agricultural company. The Company's activities include cultivating oil palms, harvesting of FFB from our oil palm plantation, and processing them (together with purchased FFB) into CPO and palm kernels.

NICHIRYO BAKING CO., LTD. makes and sells bread and pastries.  The Company also operates restaurants and manages real estate.

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...

Forsyth Barr

Dairy: Infant Formula Regulatory Clouds Clearing (Shame About Milk Powder).

Edgware remains confident in the strong operating leverage and high gross margins of A2M, despite the dampening of the milk powder opportunity. The...

Wayne Murray

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