Synlait's financial challenges and road to recovery

Company News

by Glenn Dyer

Another struggling Kiwi-listed company is Synlait (ASX:SM1); its market position has deteriorated with weaker sales, high costs, and a major falling out with its major customer, A2 Milk.

Synlait shares are down 40% this year and more than 70% in the last 12 months because of a conjunction of events that have put it under growing financial pressures. It has been looking for finance and to sell assets and has had a mixed outcome, as Monday’s statement to exchanges on both sides of the Tasman confirmed.

It couldn’t raise money in a share issue, it couldn’t sell a key asset, and it also warned that it will breach three of its four banking covenants at the end of its July financial year 30. And to top that all off, the already downgraded annual results look even worse.

And to make matters worse, the company’s declining finances and struggles have seen it lose the confidence of many of its milk suppliers who have given notice to end their deals from 206 onwards.

Its major shareholder, Bright Dairy of China, will lend Synlait $NZ130 million. Bright Dairy owns 39%, and the loan should be seen as a bailout of Synlait and a move by the Chinese group to protect its existing investment (which is in a loss-making position).

The loan will more than double Synlait’s $NZ96 million value ($NZ104 million) - the best sign of just how fraught the dairy company’s future remains.

The loan will need approval by shareholders; it is a related party transaction (Bright won’t be able to vote), and for the company, it can’t come too soon - it says it will use all the loan "to meet its prepayment obligation to the company's senior lenders, due on 15 July 2024.

"The drawdown of the loan is conditional upon Bright Dairy securing all necessary corporate, shareholder, and external approvals, as well as meeting customary drawdown conditions and consent of Synlait’s banking syndicate (including subordination terms).”

The loan is an acknowledgment by Synlait and Bright Dairy that the NZ company could not raise funds via an equity issue because the shares were too weak and investors were reluctant to invest.

Synlait Chair George Adams said in the statement: “We are grateful for the support from Bright Dairy. We are actively working with Bright Dairy on the remaining work relating to this shareholder loan and a future equity raise. The shareholder loan, and the future equity raise, will enable Synlait to reduce its debt to a sustainable level.”

At the same time, Synlait has been forced to call off its Dairyworks sale because it was also unwanted.

"Dairyworks is a high-value business, and the Board committed to ensuring the best possible return for shareholders,” the company said on Monday.

"While the Board has received interest in the business from a number of parties, a binding offer has not materialized at a level that would be acceptable. Although the company would consider credible offers, the sale process no longer remains formally open.

"Dairyworks continues to make a meaningful contribution to Synlait’s overall financial performance,” Synlaid said.

Synlait also warned that it "is now forecasting it is unlikely to meet three of its current banking covenants as at 31 July 2024, the interest coverage ratio, leverage ratio, and senior leverage ratio. This reflects the timing of Synlait's deleveraging and further weakening in its financial performance.

"The banking syndicate is currently reviewing a package of proposed waivers put forward by the company. The syndicate has continued to support Synlait and is actively engaging with the company on the requested waivers."

The company also warned investors that its lowered EBITDA for the year to July 31 will be on the low side of the smaller figure.

"Synlait still expects its FY24 EBITDA to be within the range of $NZ45 million to $NZ60 million, excluding a non-cash adjustment for the product costing method change of approximately $NZ17 million. Synlait is now forecasting the FY24 EBITDA result to be at the lower end of this range.”

And the company is facing a possible exodus of dairy farm suppliers - from 2026 onwards.

"The dairy season ended on 31 May 2024, and Synlait acknowledges that it has been an especially difficult season for its farmer suppliers, given rising input costs on-farm. Synlait also notes a significant majority of the company’s farmer supplier base have submitted cessation notices, which is expected given its current performance.

"Retention of milk supply remains a critical priority. Farmer suppliers have signaled they want to see Synlait’s balance sheet deleveraged so advanced rates can be lifted further, and submitting a cessation notice provides an option, rather than a clear intention to sign with other processors.

"Synlait is committed to working with its farmer suppliers to improve its offering. The company provided competitive forecast milk price updates for the 2023/2024 and 2024/2025 seasons, and a competitive advanced rate for the 2024/2025 season last week.

"Synlait’s current financial performance is not impacted as the cessation period is two years. This is because cessations received in the immediately preceding year up to the 31 May 2024 cut-off date would affect milk supply from FY26 onwards if they are not withdrawn."

Synlait CEO Grant Watson said in the statement: “We strongly believe that Synlait presents an excellent value proposition to farmers, with our best-in-class Lead with PrideTM program and attractive specialty milk premiums, standout features.”

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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