Synlait investors crossing fingers as troubled milk producer releases first-half results

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Devon Funds Management head of retail Greg Smith said Synlait was in a tough position.
Photo: RNZ

Investors will be looking for a resolution to Synlait’s debt situation when it releases its first-half result Tuesday morning.

The speciality milk producer had been in a trading halt since Thursday, at its request, to give it more time to arrange the repayment of a $130 million loan, which was due 28 March.

The value of its shares had been marked down by about 60 percent over the past year, following a series of negative market updates – particularly after its major customer A2 Milk cancelled an exclusive supply agreement in September 2023, related to performance and delivery standards for its Chinese-bound infant formula.

Devon Funds Management head of retail Greg Smith said Synlait was in a tough position.

“I think it’s fair to say Synlait is one company that’s under siege,” he said. “They’ve been heavily reliant on A2 Milk, so that’s not coming a great time either.”

In December, A2 Milk ramped up pressure on Synlait by adding an unspecified amount of costs to the ongoing contract dispute.

The companies were working through a binding arbitration process after negotiations between the parties failed, which was expected to be settled some time in 2024.

Synlait had already been diversifying its product range and customer base to reduce its reliance on A2 Milk. It was also looking to sell its consumer products business DairyWorks, bought in 2019 for $112m, but it was unclear what progress it had made.

“They are effectively a forced seller, and that’s widely known. So it can always be sold, but it’s a question of at what price,” Smith said.

“Perhaps Synlait is looking for a better price than perhaps a forced seller should expect, and that might be part of the issue here.”

In the meantime, Synlait said it was talking to its banks as well as a major shareholder, China’s Bright Dairy, about financial support.

If it failed to secure the necessary support, the company could be facing some tough choices – such as selling its Dunsandel processing plant or raising new money through what would likely be a heavily discounted share issue.

In addition, Synlait continued to contend with high labour costs and raw material shortages, as well as high interest and debt servicing charges.

Smith said the company would need to demonstrate in the first-half result that its balance sheet was in good order.

“I think the main thing that the market will want to see is something that perhaps management will be able to provide and update on and that is the situation with the balance sheet, and in particular debt.

“Possibly it won’t be so much about the bottom line and earnings but more about how that debt situation is going to be alleviated, because whether earnings are up or down slightly, that debt load is clearly a heavyweight.”