Asian Demand And Automation Will Transform Premium Dairy Amid Risks

Key Takeaways

• Commercialization of new product ranges and innovation in nutrition are set to drive above-expected revenue growth and capture higher margin opportunities.
  
• Cost optimization, automation, and strategic global partnerships are likely to structurally reduce costs and expand margins over the medium to long term.
  
• Diversification into advanced nutrition, operational efficiencies, customer expansion, and improved supplier relations are strengthening Synlait's resilience and supporting its ongoing revenue 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.

• While analyst consensus acknowledges Synlait's current Advanced Nutrition growth may slow, there is substantial evidence that new customer wins and commercialization of the Nutrabase range could create a sustained step-change in sales volumes, driving revenue growth beyond consensus expectations.
  
• Analysts broadly agree that the recent optimization at the North Island plant and ongoing cost efficiencies are positives; however, further operational and automation improvements at Synlait's advanced sites could drive a structural reduction in costs, leading to margin expansion in excess of consensus forecasts.
  
• Accelerating demand for premium dairy and specialty nutrition in Asia, supported by the rising middle class and evolving dietary preferences, is likely to drive long-term top-line growth as Synlait solidifies its regional partnerships and market presence.
  
• Synlait's increasing focus on clean-label and high-protein nutrition products aligns with global shifts toward health and wellness, positioning the company to capture share in premium segments and support higher margin earnings for years ahead.
  
• Strategic international supply agreements, expanded e-commerce presence, and product innovation in plant-based and hybrid nutrition are likely to create new high-value revenue streams, lifting group revenues and net profitability over the medium to long term.

Synlait Milk Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Synlait Milk compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Synlait Milk's revenue will grow by 6.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -4.6% today to 4.7% in 3 years time.
• The bullish analysts expect earnings to reach NZ$100.1 million (and earnings per share of NZ$0.17) by about September 2028, up from NZ$-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 bullish analyst cohort, the company would need to trade at a PE ratio of 5.8x on those 2028 earnings, up from -5.6x 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

• Synlait is experiencing robust growth in its Advanced Nutrition segment, marked by a 28 percent increase in sales volumes and an 80 percent rise in gross profit, suggesting that innovation and diversification beyond traditional dairy may help to offset secular headwinds and support ongoing revenue growth.
  
• The company has made significant progress in reducing net debt, achieving a 29 percent reduction, and continues to enhance cash flow through improved working capital and operational efficiency, which could lead to further improvements in net margins and overall financial stability.
  
• Synlait has demonstrated the ability to optimize manufacturing operations by lowering conversion costs and improving production efficiency, which has already led to higher gross margins and may enable the company to remain competitive even as global price competition intensifies.
  
• The solid expansion of new and existing customer relationships in Advanced Nutrition and Dairyworks, together with successful market entries in Southeast Asia and Australia, indicate the company is diversifying its sales base and mitigating customer concentration risk, which could help to stabilize or grow future revenues.
  
• Improving trust and retention among milk suppliers and securing new interest from potential suppliers positions Synlait to maintain and potentially increase milk supply volumes, which, along with secure premium incentives, can help ensure steady input flows and safeguard revenue streams.

Valuation

• The assumed bullish price target for Synlait Milk is NZ$0.64, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be NZ$2.1 billion, earnings will come to NZ$100.1 million, and it would be trading on a PE ratio of 5.8x, assuming you use a discount rate of 6.9%.
• Given the current share price of NZ$0.76, the bullish analyst price target of NZ$0.64 is 18.0% 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.