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Synlait profit rises 10%

Synlait profit rises 10%; Pokeno legal exposure 'not substantial'

By Rebecca Howard

Sept. 12 (BusinessDesk) - Synlait Milk lifted annual net profit 10 percent and said it remains sanguine about legal issues facing its soon-to-be commissioned Pokeno plant.

Profit rose to $82.2 million in the year ended July 31 from $74.6 million a year earlier. Revenue climbed 17 percent to $1.02 billion, the milk processor said.

“This growth was despite an overall drop in the value of the farm gate milk price during the year, which reduced revenues by more than $30 million on a like-for-like product mix. Underlying revenue growth therefore exceeded 20 percent,” said chairman Graeme Milne

Total sales volumes lifted 15 percent to 149,730 tonnes and its consumer-packaged infant formula volumes were 42,907 tonnes, up 21 percent on the year and in line with its guidance of 41,000-45,000.

Powders and cream sales increased 15 percent to 106,802 tonnes while lactoferrin sales increased 33 percent to 21 tonnes from 16 tonnes, with a favourable pricing environment driving better margins.

However, gross profit per tonne slipped to $1,268 versus $1,294 in the prior year. Consumer-packaged infant formula sales were at lower margins due to the renegotiation of its supply agreement with A2 Milk. Synlait saw changes to customer mix as it awaits formal registration from China for the Akara and e-Akara infant formula brands.

In late January 2015, Synlait acquired a 25 percent shareholding in New Hope Nutritionals for $2.2 million, which owns and distributes the Akara and e-Akara infant formula brands in China.

“The Akara formulation registration has been accepted subject to a site audit and we continue to work through the registration process for e-Akara,” it said.

The net profit number and the infant formula volumes were below Morgans analysts' forecasts, who had expected a 17.5 percent lift in net profit and a 23 percent increase in the canned infant formula volumes.

Regarding legal issues facing the Pokeno Plant, Synlait acknowledged the uncertainty it had created but said it remains "comfortable with our legal position.”

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.

In June, Synlait filed an application to appeal to the Supreme Court to have the decision overturned. A hearing has been scheduled on Oct. 21 to consider whether leave for an appeal will be granted.

The company said it is working toward either a reasonable settlement offer or a court outcome.

“We are comfortable that our legal exposure is not substantial,” the company said.

Synlait determined, and the auditors agreed, that no provision is required under the accounting standards in its financial statements.

According to the financial statement, "there are a range of possible outcomes for the group including a negotiated settlement between the parties. Given the range of possible outcomes the group is not able to reliably estimate any potential liability," it said.

The $260 million plant will add 45,000 tonnes of infant base powder manufacturing capacity. It was due to be commissioned shortly.

Synlait also announced it would invest $32 million in Dry Store 4 – an additional 30,000 square-metre warehouse at its Dunsandel site.

The warehouse will create 20 new jobs and is expected to be completed in September 2020. Total usable warehouse space at Dunsandel will increase to 55,000 sqm on completion.

The company has long acknowledged that its business is focused around one sector, one market and one customer, which is infant formula for China via A2 Milk. While it sees this as a strength it is also working to diversify.

While it said its pipeline of potential customers remains strong, significant new, announceable and material agreements are yet to materialise.

Also, the evolving regulatory environment in the industry is expected to create on-farm challenges, it said.

Synlait shares last traded at $9.64 and are up 7 percent so far this year.



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