Synlait Milk Ltd [ASX:SM1] was struck by a blow today following the release of their half-year results for FY19.
At time of writing, shares for Synlait are down 14.40% to $9.57.
A major New Zealand-based diary processer and supplier, Synlait has moved beyond their original role of supplying milk powder ingredients, eventually becoming a global supplier. They have partnerships with major investors including the A2 Milk Company and China’s Bright Diary.
‘Solid half year earnings performance’
The announcement is a disappointing result for the dual-listed company as initial sentiment pointed toward a favourable outcome, particularly after it was announced that they had partnered with a2 Milk to meet Chinese demand.
Instead, today’s report revealed that while overall revenue increased by 7% to NZ$471 million, the cost of sales increased by 9% to NZ$385.1 million. EBIT (earnings before interest and taxes) also fell by 9% to NZ$59 million.
The NPAT (net profit after tax) for FY19 is NZ$37.3 million — 9.7% lower than the NZ$41.3 million NPAT result in FY18.
Part of the puzzle of their higher revenues but lower net profit is answered their increased volumes for infant formula — up 5% on the corresponding period, but at lower profit margins.
‘This is a result of the new pricing agreement entered into with The a2 Milk Company last July, as well as not having the benefit of the higher margin sales to our China-based customers that we enjoyed in HY18. These brands are awaiting State Administration for Market Regulation registration.’
Why is this a surprise for investors?
While Synlait are putting a good spin on things by focusing on their new growth opportunities and environmental sustainability, the truth (for now) is that they’re suffering from lower margins overseas as well as greater barriers to sell in the Chinese market.
The company maintains that they are on track to meet their original guidance for canned infant formula, at 41,000–45,000 MT. It appears that Synlait are banking on much stronger growth in the second half of the financial year on the back of these volumes.
But investors may still be concerned that even if profits do pick up in the second half, the result will be far short of the profit achieved in 2018.
Synlait is currently making plans to expand their manufacturing and diary packaging capabilities throughout New Zealand.
For Money Morning
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