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<br>FY21 Result&nbsp;— Waiting for the Next Chapter</h2>
<div></div>
<p><strong>NEUTRAL</strong></p>
<p>FY21 has been a tumultuous period for&nbsp;Synlait&nbsp;Milk (SML), with a material NPAT loss given a suite of (now) well-publicised issues. The result itself was weaker than expected and at the lower end of guidance, albeit better than expected working capital management saw a surprising reduction in debt levels. SML has put forward a high-level road map on the recovery path, which appears logical and should support earnings materially ahead of FY21 levels. However, this is not without risk. Notably significant internal changes are being made (including a new CEO), leverage is high and visibility on key drivers is low. There is a high margin of error in earnings forecasts, and return on&nbsp;capital is also unlikely to return to prior highs, in our view. We view the risk/reward as broadly balanced at current levels. NEUTRAL.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/234/original/image_49715524521632790947117.png?1632790947" class="editor-image img-responsive" data-smartkarma-image-id="232234"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_2584302010545658315iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;FY22E NPAT revised -7%, FY23E -6%, FY24E -1%.</li>
<li><strong>Target price</strong>:&nbsp;NZ$3.55&nbsp;(+3%) with lower debt and rolling forward our valuation outweighing near-term earnings downgrades.</li>
</ul>
</div>
<div>
<h3>Key points of interest</h3>
</div>
<div id="m_2584302010545658315im9u1">
<ul>
<li><strong>FY21 result; a year to forget</strong>:&nbsp;SML reported an NPAT loss of -NZ$28.5m.&nbsp;This was at the lower end of guidance (loss of -NZ$20–30m) and below our expectations with gross profit weaker than expected across most divisions.&nbsp;The challenges in FY21 have been well signalled through the&nbsp;year&nbsp;and operating de-leverage amplifies the impact. The key positive was better than expected inventory management&nbsp;and therefore operating&nbsp;cashflow&nbsp;and debt levels.</li>
<li><strong>Gearing materially elevated, albeit lower than expected</strong>:&nbsp;SML reported net debt of NZ$477m, down -9% from FY20, and better than expected. Gearing is&nbsp;unsustainably&nbsp;high (debt to EBITDA of 12.9x), although SML has a temporary covenant waiver for FY21. Looking forward, the company has a new covenant limit of 4.5x for FY22.&nbsp;Guidance&nbsp;for debt to EBITDA well below 4x&nbsp;is consistent with our forecasts, albeit this still requires execution of a meaningful earnings recovery and inventory reduction in FY22.</li>
<li><strong>Where to from here?&nbsp;</strong>SML has put forward a seemingly logical strategy to return the business to prior profitability levels (albeit with a materially different mix) over the next two years.&nbsp; Execution is now key.
<ul>
<li>​​​​​​​FY22: Guidance is for a return to "robust profitability". Our base case assumes some recovery, with an alleviation of various temporary issues seen in FY21, self-help and cost-out initiatives, and a less volatile infant formula situation.</li>
<li>FY23: SML provided qualitative guidance for a return to&nbsp;"similar levels of profitability as years leading into FY21".&nbsp;At face value this implies NPAT of c. NZ$75–80m. The turnaround phase is likely to be multi-year&nbsp;and FY23 (onwards) is helped by its material new customer, with commercial production due to commence in late 2022. Our forecasts take a more conservative stance at this juncture,&nbsp;until&nbsp;there is evidence of improving execution in the underlying business and new initiatives.&nbsp;</li>
</ul>
</li>
<li><strong>New CEO appointment appears logical</strong>:&nbsp;Grant Watson —&nbsp;to start in January 2022. Grant has&nbsp;extensive&nbsp;relevant experience (most recently CEO of&nbsp;Miraka, and prior experience includes 10 years&nbsp;at&nbsp;Fonterra&nbsp;across a number of roles, and&nbsp;McDonalds&nbsp;NZ).</li>
</ul>
</div>

Synlait Milk FY21 Result&nbsp;— Waiting for the Next Chapter

NEUTRAL
FY21 has been a tumultuous period for&nbsp;Synlait&nbsp;Milk (SML), with a material NPAT loss given a suite of (now) well-publicised issues. The result itself was weaker than expected and at the lower end of guidance, albeit better than expected working capital management saw a surprising reduction in debt levels. SML has put forward a high-level road map on the recovery path, which appears logical and should support earnings materially ahead of FY21 levels. However, this is not without risk. Notably significant internal changes are being made (including a new CEO), leverage is high and visibility on key drivers is low. There is a high margin of error in earnings forecasts, and return on&nbsp;capital is also unlikely to return to prior highs, in our view. We view the risk/reward as broadly balanced at current levels. NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;FY22E NPAT revised -7%, FY23E -6%, FY24E -1%.
Target price:&nbsp;NZ$3.55&nbsp;(+3%) with lower debt and rolling forward our valuation outweighing near-term earnings downgrades.



Key points of interest



FY21 result; a year to forget:&nbsp;SML reported an NPAT loss of -NZ$28.5m.&nbsp;This was at the lower end of guidance (loss of -NZ$20–30m) and below our expectations with gross profit weaker than expected across most divisions.&nbsp;The challenges in FY21 have been well signalled through the&nbsp;year&nbsp;and operating de-leverage amplifies the impact. The key positive was better than expected inventory management&nbsp;and therefore operating&nbsp;cashflow&nbsp;and debt levels.
Gearing materially elevated, albeit lower than expected:&nbsp;SML reported net debt of NZ$477m, down -9% from FY20, and better than expected. Gearing is&nbsp;unsustainably&nbsp;high (debt to EBITDA of 12.9x), although SML has a temporary covenant waiver for FY21. Looking forward, the company has a new covenant limit of 4.5x for FY22.&nbsp;Guidance&nbsp;for debt to EBITDA well below 4x&nbsp;is consistent with our forecasts, albeit this still requires execution of a meaningful earnings recovery and inventory reduction in FY22.
Where to from here?&nbsp;SML has put forward a seemingly logical strategy to return the business to prior profitability levels (albeit with a materially different mix) over the next two years.&nbsp; Execution is now key.

​​​​​​​FY22: Guidance is for a return to "robust profitability". Our base case assumes some recovery, with an alleviation of various temporary issues seen in FY21, self-help and cost-out initiatives, and a less volatile infant formula situation.
FY23: SML provided qualitative guidance for a return to&nbsp;"similar levels of profitability as years leading into FY21".&nbsp;At face value this implies NPAT of c. NZ$75–80m. The turnaround phase is likely to be multi-year&nbsp;and FY23 (onwards) is helped by its material new customer, with commercial production due to commence in late 2022. Our forecasts take a more conservative stance at this juncture,&nbsp;until&nbsp;there is evidence of improving execution in the underlying business and new initiatives.&nbsp;


New CEO appointment appears logical:&nbsp;Grant Watson —&nbsp;to start in January 2022. Grant has&nbsp;extensive&nbsp;relevant experience (most recently CEO of&nbsp;Miraka, and prior experience includes 10 years&nbsp;at&nbsp;Fonterra&nbsp;across a number of roles, and&nbsp;McDonalds&nbsp;NZ).



Synlait Milk: FY21 Result — Waiting for the Next Chapter

<h2>Synlait Milk<br>FY21 Preview&nbsp;— A Year in the Red</h2>
<div></div>
<p><strong>NEUTRAL</strong></p>
<p>FY21 guidance was provided in late May, hence, focus is predominantly on result make-up and outlook when Synlait Milk (SML) reports on Monday, 27 September. FY21 has been a tumultuous period for SML with four profit downgrades driven by the material demand reduction from The a2 Milk Company (ATM), and required pivot into lower margin Ingredients,&nbsp; amplified by a number of temporary issues, the rapid pace of change and timing (at the end of its expansionary capex phase). Key focus areas in the result: (1) balance sheet (gearing, working capital and inventory levels), (2) FY22 outlook commentary, and (3) business organisational structure/strategy update.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/721/original/image_20169792721632099373109.png?1632099375" class="editor-image img-responsive" data-smartkarma-image-id="230721"></figure>
<div>
<h3>Key points of interest</h3>
</div>
<div id="m_6976092775213974348is6wa">
<ul>
<li><strong>FY21 result detail</strong>:&nbsp;Headline numbers were pre-released in May 2021, for an NPAT loss of -NZ$20m to -NZ$30m. Of interest is divisional mix and make-up, and any greater clarity on various one-off/temporary impacts weighing on the result.&nbsp;</li>
<li><strong>Outlook and&nbsp;strategic initiatives</strong>:&nbsp;​​​​​​​We do not expect quantitative FY22 guidance, albeit are looking for any colour to help narrow the range of feasible outcomes for key drivers. This includes an update on progress with planned short-term cost and capacity changes. Our base case is for some recovery in FY22E, with an alleviation of temporary issues seen in FY21 and self-help initiatives — albeit risk remains that it takes longer than anticipated to turn the corner and/or see benefits of various&nbsp;changes being made. &nbsp;</li>
<li><strong>Balance sheet</strong>:&nbsp;We look for an update on working capital&nbsp;(particularly inventory levels), gearing, and the path forward. Gearing is materially elevated (FY21E net debt to EBITDA of ~10x), however, SML has a temporary covenant waiver in place for FY21. The company has also recently extended and refinanced its debt facilities, including a temporary lift in its working capital facility. In May 2021, SML stated it does not intend to undertake a capital raising.&nbsp;Gearing is still likely to be&nbsp;elevated near-term — we look for&nbsp;any insight on available measures to address this, particularly should the earnings recovery take longer than anticipated.</li>
</ul>
</div>
<div>
<h3>Investor briefing&nbsp;— 11am on Monday, 27 September</h3>
</div>
<div id="m_6976092775213974348iu6ur">
<p>Requires pre-registration;&nbsp;<a href="https://s1.c-conf.com/DiamondPass/10014713-dj95s2.html" target="_blank" rel="noopener">https://s1.c-conf.com/DiamondPass/10014713-dj95s2.html</a><a href="http://s1.c-conf.com/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://s1.c-conf.com/&amp;source=gmail&amp;ust=1632185310536000&amp;usg=AFQjCNFYqAvyA_mXOXgGudktkzxDsI4iVg" rel="noopener"><wbr></a><wbr></p>
</div>

Synlait Milk FY21 Preview&nbsp;— A Year in the Red

NEUTRAL
FY21 guidance was provided in late May, hence, focus is predominantly on result make-up and outlook when Synlait Milk (SML) reports on Monday, 27 September. FY21 has been a tumultuous period for SML with four profit downgrades driven by the material demand reduction from The a2 Milk Company (ATM), and required pivot into lower margin Ingredients,&nbsp; amplified by a number of temporary issues, the rapid pace of change and timing (at the end of its expansionary capex phase). Key focus areas in the result: (1) balance sheet (gearing, working capital and inventory levels), (2) FY22 outlook commentary, and (3) business organisational structure/strategy update.


Key points of interest



FY21 result detail:&nbsp;Headline numbers were pre-released in May 2021, for an NPAT loss of -NZ$20m to -NZ$30m. Of interest is divisional mix and make-up, and any greater clarity on various one-off/temporary impacts weighing on the result.&nbsp;
Outlook and&nbsp;strategic initiatives:&nbsp;​​​​​​​We do not expect quantitative FY22 guidance, albeit are looking for any colour to help narrow the range of feasible outcomes for key drivers. This includes an update on progress with planned short-term cost and capacity changes. Our base case is for some recovery in FY22E, with an alleviation of temporary issues seen in FY21 and self-help initiatives — albeit risk remains that it takes longer than anticipated to turn the corner and/or see benefits of various&nbsp;changes being made. &nbsp;
Balance sheet:&nbsp;We look for an update on working capital&nbsp;(particularly inventory levels), gearing, and the path forward. Gearing is materially elevated (FY21E net debt to EBITDA of ~10x), however, SML has a temporary covenant waiver in place for FY21. The company has also recently extended and refinanced its debt facilities, including a temporary lift in its working capital facility. In May 2021, SML stated it does not intend to undertake a capital raising.&nbsp;Gearing is still likely to be&nbsp;elevated near-term — we look for&nbsp;any insight on available measures to address this, particularly should the earnings recovery take longer than anticipated.



Investor briefing&nbsp;— 11am on Monday, 27 September


Requires pre-registration;&nbsp;https://s1.c-conf.com/DiamondPass/10014713-dj95s2.html


Synlait Milk: FY21 Preview — A Year in the Red

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<p>S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 100, <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> and S&amp;P/ASX300 as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.</p><p>The review period for the rebalance ends on 20 August, so there are only 3 days to go in the review period with 124 days completed.</p><p>For the ASX100, we see <a href="https://www.smartkarma.com/entities/boral-ltd" target="_blank" data-smartkarma-citation="entities:1487:1" rel="noopener">Boral Ltd (BLD AU)</a> as a potential deletion following the reduction in its free float following <a href="https://www.smartkarma.com/entities/seven-group-holdings-ltd" target="_blank" data-smartkarma-citation="entities:803:1" rel="noopener">Seven Group Holdings (SVW AU)</a>'s tender offer. This is the possibility of another change with <a href="https://www.smartkarma.com/entities/steadfast-group-ltd" target="_blank" data-smartkarma-citation="entities:8181:1" rel="noopener">Steadfast (SDF AU)</a> replacing <a href="https://www.smartkarma.com/entities/beach-energy-ltd" target="_blank" data-smartkarma-citation="entities:795:1" rel="noopener">Beach Energy (BPT AU)</a> in the index.</p><p>For the <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a>, we see <a href="https://www.smartkarma.com/entities/pinnacle-investment-management" target="_blank" data-smartkarma-citation="entities:20624:1" rel="noopener">Pinnacle Investment Management (PNI AU)</a>, <a href="https://www.smartkarma.com/entities/sealink-travel-group-ltd" target="_blank" data-smartkarma-citation="entities:6400:1" rel="noopener">Sealink Travel (SLK AU)</a>, <a href="https://www.smartkarma.com/entities/de-grey-mining-ltd" target="_blank" data-smartkarma-citation="entities:6192:1" rel="noopener">De Grey Mining (DEG AU)</a> and <a href="https://www.smartkarma.com/entities/amalgamated-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20978:1" rel="noopener">Event Hospitality and Entertainment (EVT AU)</a> as potential inclusions, while <a href="https://www.smartkarma.com/entities/nuix-limited" target="_blank" data-smartkarma-citation="entities:31040:1" rel="noopener">Nuix Limited (NXL AU)</a>, <a href="https://www.smartkarma.com/entities/nrw-holdings-ltd" target="_blank" data-smartkarma-citation="entities:9271:1" rel="noopener">NRW Holdings (NWH AU)</a>, <a href="https://www.smartkarma.com/entities/g8-education-ltd" target="_blank" data-smartkarma-citation="entities:581:1" rel="noopener">G8 Education (GEM AU)</a> and <a href="https://www.smartkarma.com/entities/westgold-resources-ltd" target="_blank" data-smartkarma-citation="entities:24269:1" rel="noopener">Westgold Resources (WGX AU)</a> are potential deletions.</p><p>For the ASX300, potential inclusions are <a href="https://www.smartkarma.com/entities/paladin-energy-ltd" target="_blank" data-smartkarma-citation="entities:10117:1" rel="noopener">Paladin Energy (PDN AU)</a>, <a href="https://www.smartkarma.com/entities/imugene-ltd" target="_blank" data-smartkarma-citation="entities:20276:1" rel="noopener">Imugene Ltd (IMU AU)</a>, <a href="https://www.smartkarma.com/entities/liontown-resources-ltd" target="_blank" data-smartkarma-citation="entities:20488:1" rel="noopener">Liontown Resources (LTR AU)</a>, <a href="https://www.smartkarma.com/entities/betmakers-technology-group-ltd" target="_blank" data-smartkarma-citation="entities:25489:1" rel="noopener">BetMakers Technology Group (BET AU)</a>, <a href="https://www.smartkarma.com/entities/novonix-ltd" target="_blank" data-smartkarma-citation="entities:29093:1" rel="noopener">Novonix Ltd (NVX AU)</a>, <a href="https://www.smartkarma.com/entities/dubber-corp-ltd" target="_blank" data-smartkarma-citation="entities:15396:1" rel="noopener">Dubber Corp Ltd (DUB AU)</a>, <a href="https://www.smartkarma.com/entities/johns-lyng-group-ltd" target="_blank" data-smartkarma-citation="entities:26649:1" rel="noopener">Johns Lyng (JLG AU)</a> and <a href="https://www.smartkarma.com/entities/strike-energy-ltd" target="_blank" data-smartkarma-citation="entities:12473:1" rel="noopener">Strike Energy (STX AU)</a>, while potential deletions are <a href="https://www.smartkarma.com/entities/bubs-australia-ltd" target="_blank" data-smartkarma-citation="entities:6296:1" rel="noopener">Bubs Australia (BUB AU)</a>, <a href="https://www.smartkarma.com/entities/synlait-milk-ltd" target="_blank" data-smartkarma-citation="entities:16298:1" rel="noopener">Synlait Milk (SML NZ)</a>, <a href="https://www.smartkarma.com/entities/integrated-research-ltd" target="_blank" data-smartkarma-citation="entities:6744:1" rel="noopener">Integrated Research (IRI AU)</a>, <a href="https://www.smartkarma.com/entities/maca-ltd" target="_blank" data-smartkarma-citation="entities:11390:1" rel="noopener">Maca Ltd (MLD AU)</a> and <a href="https://www.smartkarma.com/entities/medical-developments-international" target="_blank" data-smartkarma-citation="entities:18644:1" rel="noopener">Medical Developments International (MVP AU)</a>.</p><p>The impact is quite large on the <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> expected changes while there could be a large impact on <a href="https://www.smartkarma.com/entities/steadfast-group-ltd" target="_blank" data-smartkarma-citation="entities:8181:1" rel="noopener">Steadfast (SDF AU)</a> if it is included in the ASX100.</p>

S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 100, S&amp;P/ASX 200 (AS51 INDEX) and S&amp;P/ASX300 as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.The review period for the rebalance ends on 20 August, so there are only 3 days to go in the review period with 124 days completed.For the ASX100, we see Boral Ltd (BLD AU) as a potential deletion following the reduction in its free float following Seven Group Holdings (SVW AU)'s tender offer. This is the possibility of another change with Steadfast (SDF AU) replacing Beach Energy (BPT AU) in the index.For the S&amp;P/ASX 200 (AS51 INDEX), we see Pinnacle Investment Management (PNI AU), Sealink Travel (SLK AU), De Grey Mining (DEG AU) and Event Hospitality and Entertainment (EVT AU) as potential inclusions, while Nuix Limited (NXL AU), NRW Holdings (NWH AU), G8 Education (GEM AU) and Westgold Resources (WGX AU) are potential deletions.For the ASX300, potential inclusions are Paladin Energy (PDN AU), Imugene Ltd (IMU AU), Liontown Resources (LTR AU), BetMakers Technology Group (BET AU), Novonix Ltd (NVX AU), Dubber Corp Ltd (DUB AU), Johns Lyng (JLG AU) and Strike Energy (STX AU), while potential deletions are Bubs Australia (BUB AU), Synlait Milk (SML NZ), Integrated Research (IRI AU), Maca Ltd (MLD AU) and Medical Developments International (MVP AU).The impact is quite large on the S&amp;P/ASX 200 (AS51 INDEX) expected changes while there could be a large impact on Steadfast (SDF AU) if it is included in the ASX100.

ASX100/200/300 Index Rebalance Preview: Big Impact & Large Shorts

<p>S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 300 Index as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.</p><p>We have 8 days to go in the review period. The index currently has 297 members, so there will be 3 more adds as compared to the deletes.</p><p>We see 8 potential inclusions at the review: <a href="https://www.smartkarma.com/entities/paladin-energy-ltd" target="_blank" data-smartkarma-citation="entities:10117:1" rel="noopener">Paladin Energy (PDN AU)</a>, <a href="https://www.smartkarma.com/entities/imugene-ltd" target="_blank" data-smartkarma-citation="entities:20276:1" rel="noopener">Imugene Ltd (IMU AU)</a>, <a href="https://www.smartkarma.com/entities/liontown-resources-ltd" target="_blank" data-smartkarma-citation="entities:20488:1" rel="noopener">Liontown Resources (LTR AU)</a>, <a href="https://www.smartkarma.com/entities/betmakers-technology-group-ltd" target="_blank" data-smartkarma-citation="entities:25489:1" rel="noopener">BetMakers Technology Group (BET AU)</a>, <a href="https://www.smartkarma.com/entities/novonix-ltd" target="_blank" data-smartkarma-citation="entities:29093:1" rel="noopener">Novonix Ltd (NVX AU)</a>, <a href="https://www.smartkarma.com/entities/dubber-corp-ltd" target="_blank" data-smartkarma-citation="entities:15396:1" rel="noopener">Dubber Corp Ltd (DUB AU)</a>, <a href="https://www.smartkarma.com/entities/johns-lyng-group-ltd" target="_blank" data-smartkarma-citation="entities:26649:1" rel="noopener">Johns Lyng (JLG AU)</a> and <a href="https://www.smartkarma.com/entities/strike-energy-ltd" target="_blank" data-smartkarma-citation="entities:12473:1" rel="noopener">Strike Energy (STX AU)</a>. </p><p>We see 5 potential deletions at the review: <a href="https://www.smartkarma.com/entities/bubs-australia-ltd" target="_blank" data-smartkarma-citation="entities:6296:1" rel="noopener">Bubs Australia (BUB AU)</a>, <a href="https://www.smartkarma.com/entities/synlait-milk-ltd" target="_blank" data-smartkarma-citation="entities:16298:1" rel="noopener">Synlait Milk (SML NZ)</a>, <a href="https://www.smartkarma.com/entities/integrated-research-ltd" target="_blank" data-smartkarma-citation="entities:6744:1" rel="noopener">Integrated Research (IRI AU)</a>, <a href="https://www.smartkarma.com/entities/maca-ltd" target="_blank" data-smartkarma-citation="entities:11390:1" rel="noopener">Maca Ltd (MLD AU)</a> and <a href="https://www.smartkarma.com/entities/medical-developments-interna" target="_blank" data-smartkarma-citation="entities:18644:1" rel="noopener">Medical Developments International (MVP AU)</a>.</p><p>Among the potential adds, shorts have risen sharply on <a href="https://www.smartkarma.com/entities/imugene-ltd" target="_blank" data-smartkarma-citation="entities:20276:1" rel="noopener">Imugene Ltd (IMU AU)</a> and <a href="https://www.smartkarma.com/entities/betmakers-technology-group-ltd" target="_blank" data-smartkarma-citation="entities:25489:1" rel="noopener">BetMakers Technology Group (BET AU)</a> while shorts have risen on <a href="https://www.smartkarma.com/entities/medical-developments-interna" target="_blank" data-smartkarma-citation="entities:18644:1" rel="noopener">Medical Developments International (MVP AU)</a> and <a href="https://www.smartkarma.com/entities/bubs-australia-ltd" target="_blank" data-smartkarma-citation="entities:6296:1" rel="noopener">Bubs Australia (BUB AU)</a> among the potential deletions.</p>

S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 300 Index as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.We have 8 days to go in the review period. The index currently has 297 members, so there will be 3 more adds as compared to the deletes.We see 8 potential inclusions at the review: Paladin Energy (PDN AU), Imugene Ltd (IMU AU), Liontown Resources (LTR AU), BetMakers Technology Group (BET AU), Novonix Ltd (NVX AU), Dubber Corp Ltd (DUB AU), Johns Lyng (JLG AU) and Strike Energy (STX AU). We see 5 potential deletions at the review: Bubs Australia (BUB AU), Synlait Milk (SML NZ), Integrated Research (IRI AU), Maca Ltd (MLD AU) and Medical Developments International (MVP AU).Among the potential adds, shorts have risen sharply on Imugene Ltd (IMU AU) and BetMakers Technology Group (BET AU) while shorts have risen on Medical Developments International (MVP AU) and Bubs Australia (BUB AU) among the potential deletions.

ASX300 Sep 2021 Index Rebalance Preview: Changes Galore

<h2>Synlait Milk<br>FY21 Guidance Cut</h2>
<div></div>
<p><strong>NEUTRAL</strong></p>
<p>Synlait&nbsp;Milk (SML) has further downgraded FY21 guidance, with 'new' management revisiting assumptions for pre-existing areas of uncertainty and challenges. Revised guidance is seemingly conservative and it is not difficult to forecast future earnings materially ahead of what appears to be a low-point in FY21. However, low visibility, a multitude of moving parts and heightened uncertainty limits our confidence and means there is a high margin of error in earnings forecasts. Return on capital is also unlikely to return to prior highs, in our view. Current valuation metrics are not demanding, however, given the uncertainty and risk we require a much higher margin of safety.&nbsp; NEUTRAL.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/208/730/original/image_83787716541621900631483.png?1621900633" class="editor-image img-responsive" data-smartkarma-image-id="208730"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_-5334906454732623528iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;FY21E materially cut, consistent with guidance. Medium-term also lowered -9% to -15%.</li>
<li><strong>Target price</strong>:&nbsp;Lowered to NZ$3.45&nbsp;(-11%).</li>
</ul>
</div>
<div>
<h3>FY21 guidance lowered, again</h3>
</div>
<div id="m_-5334906454732623528id9fr">
<p>SML has lowered FY21 guidance, now signalling expectations for an NPAT loss of -NZ$20m to -NZ$30m. This is materially below prior guidance (~NZ$0m) and market expectations. The change reflects revised assumptions and appears to be 'new' management taking a more conservative stance on the risks/areas of uncertainty, rather than a further deterioration in the business or new issues. Key downgrade drivers (evenly split): (1) ingredient sales delays (up to 10,000 MT) due to shipping constraints —&nbsp;a timing issue, (2) lower pricing&nbsp;for ingredients products, (3) a more conservative approach to year-end inventory volumes and valuation.&nbsp;</p>
</div>
<div>
<h3>Where to from here? Still no clearer</h3>
</div>
<div id="m_-5334906454732623528ih2ok">
<p>FY21 has been a dismal year&nbsp;with a plethora of (now) well-publicised issues, amplified by one-offs, the rapid pace of change and timing (at the end of its expansionary&nbsp;capex&nbsp;phase). The path from here is still no clearer, with a high margin of error in earnings forecasts, not helped by low external visibility on key drivers, a volatile backdrop and high leverage.&nbsp;Our base case is for some recovery in FY22E, with an&nbsp;alleviation of temporary issues seen in FY21, some self-help initiatives and an&nbsp;improved infant formula situation.&nbsp;We assume a further step-up in FY23E, aligned to our a2 Milk volume forecasts and first-time impact of&nbsp;SML's&nbsp;new multi-national customer.</p>
</div>
<div>
<h3>Elevated gearing; temporary covenant waiver provided</h3>
</div>
<div id="m_-5334906454732623528i1ajl">
<p>SML has removed one current risk, stating it "does not intend to undertake a capital raising" and securing covenant waivers for FY21. Our revised forecast is for net debt to EBITDA of ~3.2x in FY22E, above its internal long-term target (~2.5x) albeit within covenants (total leverage ratio ~4x). This assumes (1) execution on earnings recovery initiatives, (2) a reversal of temporary timing impacts seen in FY21 (which led to elevated inventory) and (3) a modest capex outlook. These assumptions (particularly #1) are not risk-free.&nbsp;</p>
</div>
<div>
<div>
<div><strong>Chelsea Leadbetter, CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
</div>

Synlait Milk FY21 Guidance Cut

NEUTRAL
Synlait&nbsp;Milk (SML) has further downgraded FY21 guidance, with 'new' management revisiting assumptions for pre-existing areas of uncertainty and challenges. Revised guidance is seemingly conservative and it is not difficult to forecast future earnings materially ahead of what appears to be a low-point in FY21. However, low visibility, a multitude of moving parts and heightened uncertainty limits our confidence and means there is a high margin of error in earnings forecasts. Return on capital is also unlikely to return to prior highs, in our view. Current valuation metrics are not demanding, however, given the uncertainty and risk we require a much higher margin of safety.&nbsp; NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;FY21E materially cut, consistent with guidance. Medium-term also lowered -9% to -15%.
Target price:&nbsp;Lowered to NZ$3.45&nbsp;(-11%).



FY21 guidance lowered, again


SML has lowered FY21 guidance, now signalling expectations for an NPAT loss of -NZ$20m to -NZ$30m. This is materially below prior guidance (~NZ$0m) and market expectations. The change reflects revised assumptions and appears to be 'new' management taking a more conservative stance on the risks/areas of uncertainty, rather than a further deterioration in the business or new issues. Key downgrade drivers (evenly split): (1) ingredient sales delays (up to 10,000 MT) due to shipping constraints —&nbsp;a timing issue, (2) lower pricing&nbsp;for ingredients products, (3) a more conservative approach to year-end inventory volumes and valuation.&nbsp;


Where to from here? Still no clearer


FY21 has been a dismal year&nbsp;with a plethora of (now) well-publicised issues, amplified by one-offs, the rapid pace of change and timing (at the end of its expansionary&nbsp;capex&nbsp;phase). The path from here is still no clearer, with a high margin of error in earnings forecasts, not helped by low external visibility on key drivers, a volatile backdrop and high leverage.&nbsp;Our base case is for some recovery in FY22E, with an&nbsp;alleviation of temporary issues seen in FY21, some self-help initiatives and an&nbsp;improved infant formula situation.&nbsp;We assume a further step-up in FY23E, aligned to our a2 Milk volume forecasts and first-time impact of&nbsp;SML's&nbsp;new multi-national customer.


Elevated gearing; temporary covenant waiver provided


SML has removed one current risk, stating it "does not intend to undertake a capital raising" and securing covenant waivers for FY21. Our revised forecast is for net debt to EBITDA of ~3.2x in FY22E, above its internal long-term target (~2.5x) albeit within covenants (total leverage ratio ~4x). This assumes (1) execution on earnings recovery initiatives, (2) a reversal of temporary timing impacts seen in FY21 (which led to elevated inventory) and (3) a modest capex outlook. These assumptions (particularly #1) are not risk-free.&nbsp;



Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



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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