SML: Financial Stability Will Face Pressure While Recovery Efforts Continue

Key Takeaways

• Reliance on Advanced Nutrition sales may lead to slower future growth due to unsustainable restocking and new product launches.
  
• Challenges like high fat pricing and unsecured milk supply could pressure margins and impact future profitability and cash flow.
  
• Strong growth in Advanced Nutrition and strategic market expansions signal positive financial momentum and future revenue potential for Synlait Milk.

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.

• Synlait Milk's reliance on increased Advanced Nutrition sales volumes may not be sustainable, as a significant portion of current growth could be driven by restocking and new product launches, which are not guaranteed to continue at the same pace. This could lead to slower revenue growth in the future.
  
• The potential challenges posed by high fat pricing could affect the Foodservice category's margins, which underperformed expectations. If these pricing pressures persist, it may lead to narrower net margins and lower overall earnings.
  
• The company has taken significant steps to reduce net debt but acknowledges that it still needs to address several operational costs and balance opportunities with risks such as milk stream returns and foreign exchange impacts. Increased uncertainty or unfavourable changes in these areas could negatively impact cash flow and net margins.
  
• Synlait Milk's future milk supply is not entirely secured, posing a risk to production capacity and revenue. The company needs to solidify its supply chain with farmers, which may involve increased costs or incentives that could pressure net margins.
  
• While cost efficiencies have been implemented, the company still faces systemic challenges at its North Island plant, which continues to operate at a loss. Failure to turn around this asset could continue to drain resources, potentially impacting future profitability and earnings.

Synlait Milk Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Synlait Milk's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.6% today to 2.2% in 3 years time.
• Analysts expect earnings to reach NZ$44.5 million (and earnings per share of NZ$0.05) by about September 2028, up from NZ$-81.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$18.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, up from -5.8x today. This future PE is lower than the current PE for the AU Food industry at 11.3x.
• 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 Milk has experienced a return to profitability, achieving an EBITDA of $63.1 million and a group NPAT of $4.8 million, which suggests potential stability and positive momentum in their earnings.
  
• Revenue increased by 16% to $916.8 million, driven by a rise in Advanced Nutrition demand, higher commodity prices, and favorable foreign exchange results, indicating potential for continued growth in revenue streams.
  
• Advanced Nutrition business showed strong growth with a 20% revenue increase and an 80% rise in gross profit, underlining its strategic significance and potential positive impact on Synlait Milk's net margins.
  
• Net debt was reduced by 29%, supported by equity placements from partners like Bright Dairy and The a2 Milk Company, which could provide financial flexibility and positively impact future earnings.
  
• Expansion into new markets, such as Hong Kong and Vietnam, and strong growth in existing ones, like Southeast Asia and Australia, through strategic partnerships, could bolster long-term revenue growth and market share expansion.

Valuation

• The analysts have a consensus price target of NZ$0.512 for Synlait Milk based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$2.0 billion, earnings will come to NZ$44.5 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of NZ$0.78, the analyst price target of NZ$0.51 is 52.2% 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.