New Zealand Professional Investment Services Firm

Forsyth Barr

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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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Synlait Milk<br>FY21 Preview&nbsp;— A Year in the Red</h2>
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<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>
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<h3>Key points of interest</h3>
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<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>
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<h3>Investor briefing&nbsp;— 11am on Monday, 27 September</h3>
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<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>
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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