China Demographics And Plant-Based Surge Will Undermine Dairy Demand

Key Takeaways

• Shifting consumer preferences and demographic changes in key export markets threaten sustained demand growth for Synlait's core dairy products.
  
• Heavy reliance on a concentrated customer base and elevated financial leverage constrain Synlait's flexibility, heightening risks to earnings stability and long-term profitability.
  
• Focus on premium exports, health-oriented product expansion, and efficiency investments is strengthening earnings resilience and positioning Synlait for long-term, sustainable growth.

Catalysts

Manufactures, markets, sells, and exports dairy products under the Dairyworks, Rolling Meadow, and Alpine brands in China, rest of Asia, the Middle East, Africa, New Zealand, Australia, and internationally.

• Accelerating consumer adoption of plant-based and alternative proteins globally threatens to erode long-term demand and volume growth for Synlait's core dairy offerings, undermining revenue growth prospects despite short-term operational improvements.
  
• China, a critical market for premium dairy and infant formula, is experiencing declining and aging population trends which are expected to structurally lower long-term dairy consumption, creating persistent headwinds for Synlait's export volumes and top-line growth.
  
• Synlait remains heavily exposed to customer concentration risk, particularly through reliance on a few major customers such as a2 Milk Company, which increases revenue volatility and leaves the company vulnerable to contract loss or adverse pricing negotiations that could compress gross margins.
  
• Despite recent debt reduction efforts, Synlait continues to carry high net debt relative to EBITDA, limiting its financial flexibility. This persistent balance sheet risk will constrain the company's ability to invest in value-added innovation or weather industry downturns, putting sustained pressure on net margins and earnings stability over the medium to long term.
  
• Increased ESG scrutiny and stricter environmental regulations targeting animal agriculture are likely to raise compliance costs for Synlait, reducing net profit margins and making long-term returns increasingly uncertain even as the company works to improve operating efficiencies.

Synlait Milk Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Synlait Milk compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Synlait Milk's revenue will grow by 6.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.6% today to 1.9% in 3 years time.
• The bearish analysts expect earnings to reach NZ$41.2 million (and earnings per share of NZ$0.07) by about September 2028, up from NZ$-81.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from -5.7x today. This future PE is lower than the current PE for the AU Food industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Synlait Milk Future Earnings Per Share Growth

Risks

• Rising global demand for premium dairy products, especially in Asia-Pacific, is driving higher export sales and premium pricing potential for Synlait Milk, supporting the company's long-term revenue growth.
  
• The company's continued expansion in value-added dairy products, such as Advanced Nutrition and non-dairy hybrid nutrition, positions it to benefit from consumer trends in health and wellness, which can lead to sustained improvements in gross margins and topline.
  
• Strategic partnerships, notably with a2 Milk Company and multinationals, are enhancing production volumes and creating steady, high-margin revenue streams, which support a stronger, more resilient earnings base over the long term.
  
• Ongoing investment in operational efficiency, such as plant optimization, cost control, and automation, is consistently reducing costs and driving higher net margins, supporting improved EBITDA and future profitability.
  
• The global expansion of middle classes, particularly in China and Southeast Asia, is increasing per capita dairy consumption, creating sustained long-term growth opportunities for Synlait's products and potentially boosting both revenue and earnings for years to come.

Valuation

• The assumed bearish price target for Synlait Milk is NZ$0.41, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Synlait Milk's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$0.64, and the most bearish reporting a price target of just NZ$0.41.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NZ$2.1 billion, earnings will come to NZ$41.2 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 6.9%.
• Given the current share price of NZ$0.77, the bearish analyst price target of NZ$0.41 is 87.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.