New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Synlait Milk</h2>
1H20 Preview&nbsp;— Pre-Released Pressure Points
NEUTRAL
Synlait Milk (SML) pre-signalled a material 1H20 profit decline (and downgraded FY20 expectations) on 13 February, however, the wide guidance range still leaves room for differences when SML reports its 1H20 result on Thursday 19 March. The rapid pace and magnitude of recent earnings pressure has seen a material dent in our (and market) confidence and raises questions, particularly on progress / greater clarity to support recent expansionary capex decisions.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SML</td>
<td style="width: 48pt;">Financials:Jul/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$5.55</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">81.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">77.3</td>
<td style="text-align: left; width: 43.2pt;">92.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">109.2&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">8.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.8</td>
<td style="text-align: left; width: 48pt;">6.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$7.20</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">45.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">43.1&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">51.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">60.9&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">9.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">8.9</td>
<td style="text-align: left; width: 42.6pt;">-5.3</td>
<td style="text-align: left; width: 43.2pt;">19.8</td>
<td style="text-align: left; width: 48pt;">17.9&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">12.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">10.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">179.2m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">2.1</td>
<td style="text-align: left; width: 42.6pt;">1.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">1.5</td>
<td style="text-align: left; width: 42.6pt;">1.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$995m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">110.1k (NZ$985k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
</tr>
</tbody>
</table>
Key points of interest
<ul type="disc">
<li>Any update to, or narrowing&nbsp;of, FY20 guidance:&nbsp;SML&nbsp;downgraded expectations on 13 February, with current&nbsp;NPAT&nbsp;guidance of NZ$70m to NZ$85m. The wide range implies growth of +3% to -15% versus FY19.</li>
<li>Any insights around the key contract with a2 Milk (ATM): We do not expect granularity given it is a commercial contract, however, we look for any insights SML can provide, particularly following ATM's recent commentary on assessing 'participation' in manufacturing capacity. Our valuation is highly sensitive to long-term assumptions on finished infant formula (namely for ATM), particularly a view on the margin SML earns. We forecast downside to current margins over the long-term as ATM continues to grow, although the quantum and timing of this is difficult to pin-point.&nbsp; We see downside risk to our current forecast trajectory.&nbsp;</li>
<li>Capacity and customers: Recent expansionary capex is weighing on near-term returns, with cost investment a drag in the early stages until utilisation ramps up. SML has material capacity to fill. We want to see progress with new customers to de-risk recent capital investment, narrow the potential earnings outcomes and show SML can replicate success on its larger asset base.</li>
<li>An update&nbsp;on&nbsp;Pokeno:&nbsp;How&nbsp;SML&nbsp;utilises capacity can dictate the feasible returns / margin profile. We look for updated insight on how to think about product mix for the site in both the short and longer-term, particularly given recent commentary from&nbsp;SML&nbsp;on pressures in infant base powder.​​​​​​​&nbsp;SML's&nbsp;legal issues at&nbsp;Pokeno&nbsp;also need resolution.&nbsp;The Supreme Court hearing is set for 29/30 April so we expect it will likely be too early for any new insights.</li>
</ul>
Result call&nbsp;— 10am NZ time; pre-registration required
SML&nbsp;will host a call at 10am on 19 March. Pre-registration is required&nbsp;​​​​​​​<a href="https://s1.c-conf.com/diamondpass/10003443-invite.html" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://s1.c-conf.com/diamondpass/10003443-invite.html&amp;source=gmail&amp;ust=1584056415429000&amp;usg=AFQjCNEDTi2WBHIEP4uT2qfIT_4bu4UhUQ" rel="noopener">https://s1.c-conf.com/diamondpass/10003443-invite.html</a>
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Synlait Milk
1H20 Preview&nbsp;— Pre-Released Pressure Points
NEUTRAL
Synlait Milk (SML) pre-signalled a material 1H20 profit decline (and downgraded FY20 expectations) on 13 February, however, the wide guidance range still leaves room for differences when SML reports its 1H20 result on Thursday 19 March. The rapid pace and magnitude of recent earnings pressure has seen a material dent in our (and market) confidence and raises questions, particularly on progress / greater clarity to support recent expansionary capex decisions.
         


NZX Code
SML
Financials:Jul/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$5.55
NPAT* (NZ$m)
81.7&nbsp;
77.3
92.6&nbsp;
109.2&nbsp;
EV/EBITDA
8.0&nbsp;
7.8
6.9&nbsp;
6.3&nbsp;


Target price
NZ$7.20
EPS* (NZc)
45.6&nbsp;
43.1&nbsp;
51.7&nbsp;
60.9&nbsp;
EV/EBIT
9.8&nbsp;
10.5&nbsp;
9.0&nbsp;
8.1&nbsp;


Risk rating
High
EPS growth* (%)
8.9
-5.3
19.8
17.9&nbsp;
PE
12.2&nbsp;
12.9&nbsp;
10.7&nbsp;
9.1&nbsp;


Issued shares
179.2m
DPS (NZc)
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
Price/NTA
2.1
1.8&nbsp;
1.5
1.3&nbsp;


Market cap
NZ$995m
Imputation (%)
100
100
100
100
Cash div yld (%)
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;


Avg daily turnover
110.1k (NZ$985k)
*Based on normalised profits


Gross div yld (%)
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;



Key points of interest

Any update to, or narrowing&nbsp;of, FY20 guidance:&nbsp;SML&nbsp;downgraded expectations on 13 February, with current&nbsp;NPAT&nbsp;guidance of NZ$70m to NZ$85m. The wide range implies growth of +3% to -15% versus FY19.
Any insights around the key contract with a2 Milk (ATM): We do not expect granularity given it is a commercial contract, however, we look for any insights SML can provide, particularly following ATM's recent commentary on assessing 'participation' in manufacturing capacity. Our valuation is highly sensitive to long-term assumptions on finished infant formula (namely for ATM), particularly a view on the margin SML earns. We forecast downside to current margins over the long-term as ATM continues to grow, although the quantum and timing of this is difficult to pin-point.&nbsp; We see downside risk to our current forecast trajectory.&nbsp;
Capacity and customers: Recent expansionary capex is weighing on near-term returns, with cost investment a drag in the early stages until utilisation ramps up. SML has material capacity to fill. We want to see progress with new customers to de-risk recent capital investment, narrow the potential earnings outcomes and show SML can replicate success on its larger asset base.
An update&nbsp;on&nbsp;Pokeno:&nbsp;How&nbsp;SML&nbsp;utilises capacity can dictate the feasible returns / margin profile. We look for updated insight on how to think about product mix for the site in both the short and longer-term, particularly given recent commentary from&nbsp;SML&nbsp;on pressures in infant base powder.​​​​​​​&nbsp;SML's&nbsp;legal issues at&nbsp;Pokeno&nbsp;also need resolution.&nbsp;The Supreme Court hearing is set for 29/30 April so we expect it will likely be too early for any new insights.

Result call&nbsp;— 10am NZ time; pre-registration required
SML&nbsp;will host a call at 10am on 19 March. Pre-registration is required&nbsp;​​​​​​​https://s1.c-conf.com/diamondpass/10003443-invite.html
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Synlait Milk: 1H20 Preview — Pre-Released Pressure Points