SML - Synlait

[Basil]

All shareholders will be called on. Current market cap now $500m. 20 = $100m for ATM. We can see why the bought Matuara.

ATM should have had a seat on the board since day one. Essentially their investment is a write off except for the value they get from a A2 formula maker.

ATM probably just waiting for when they can buy the whole plant at fire sale receivership prices.

Agreed.  Why would anyone want the whole company inclusive of all the vast numbers of ESG "enthusiasts" and their hugely bloated management structure. Just buy the stainless steel at 10-15 cents on the dollar, if the opportunity presents.

[Minimoke]

According to the last annual report 363 people earning over $1ook and 42 driving this company into the ground earning over $200,000
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[Basil]

"Impressive" payroll, no question but WHS payroll is FAR more bloated than that.  Retailing goods must be far more complex than making them   

[Minimoke]

Yes, floated at $2.20 in July 2013 and never paid a dividend since.
Another stock headed back under the float price ?

And today underwater at $2.17. 10 years and it has gone no where.

[winner (n)]

And today underwater at $2.17. 10 years and it has gone no where.

But what a ride ......all way to about 13 bucks and back again

[Basil]

But what a ride ......all way to about 13 bucks and back again

Was a lot of fun when it entered the NZX50 index.  Could be even a lot more pain coming for shareholders if it gets booted out.
In the NZ Herald today (paywalled, Rising Debt puts Synlait's balance sheet in the spotlight
https://www.nzherald.co.nz/business/synlaits-balance-sheet-in-the-spotlight-as-debt-rises/A6RGPXYQRVD7DKAT5JUYZ2J77Y/
Forbar's analyst clearly very unimpressed with the very surprising extent to which debt increased and also thinks costs will continue to rise and margins get even more pressured going forward.  Hmmm

[Gerald]

According to the last annual report 363 people earning over $1ook and 42 driving this company into the ground earning over $200,000
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Almost 40% of staff on over 100k? That's pretty crazy.

[Minimoke]

Almost 40% of staff on over 100k? That's pretty crazy.

I wonder if they still get their paid day off to plant trees?

[BlackPeter]

All their bank facilities mature in October 2023 so have to be classified as current liabilities, (within 12 months).  The mind boggles as to "IF" or on what terms new bank facilities might be offered?   I agree 100% mate, they are in a very serious financial situation.
It would seem to me someone is going to have to throw this company a lifeline in terms of new capital but who would do that after al, they recently raised $200m more as Winner has posted above.  Surely nobody is game to stump up another $200m?  Didn't they say at the last capital raise they were going to "refocus on making money and have much less focus on all the ESG stuff" or words to that effect?  What are they going to say now, oh gosh, we really mean it this time?
Regarding their unsecured bonds SML010 $180m maturing 17/12/2024.  Last traded at 8.75% = 92 cents on the dollar.  Crickey!, I think the buyer is VERY BRAVE!

The Chinese cornerstone shareholders (City of Shanghai) might be happy to put in some more money or even launch a take over. Dragons are always hungry and I am sure Kiwis will be happy to sell for a pittance. Don't we have a track record of first trashing companies and then selling them for a song ...?

This would allow them as well to make the company colours a bit more bearable. I think bright red trucks with a yellow dragon painted on it would be an improvement to the current pink ...

[Ferg]

The part that looks off to me is that in a declining revenue environment (1H22, 2H22 and 1H23 are $791m, $870m and $770m respectively) SML increased stocks on hand from $233m as at July 2022 to $468m as at Jan 2023. Why would they do that? Haven't we seen this picture before?  Sinking $235m cash into stock resulted in negative operating cashflows for 1H23 of -$125m...!  Not only is there a cost of holding excess inventory but it also carries a risk of future write downs given the bulk of that increase was finished product which AFAIK has a shelf life. The stock turn ratio will be awful. "And the band played on" ... production boosts efficiency by pumping out ever more product irrespective of downstream sales.

Meanwhile accounts receivable increased while sales fall, and the days sales outstanding ratio will also have blown out. And under note 7 we see a comment about "receivables purchases agreements ... entered into with its bankers".  It appears they have been factoring their debtors which I call the "dance of the desperate...".  This cost them $2.4m in FY22 and $2m in 1H23 for an annualised cost of $4m?! That buys a lot of staff if they didn't factor such debts. Plus I believe there is an exposure to late payment penalties if clients pay the banks late assuming I am reading the FY22 notes correctly......oh dear.

Best not to look too closely under the hood.....

[Minimoke]

The part that looks off to me is that in a declining revenue environment (1H22, 2H22 and 1H23 are $791m, $870m and $770m respectively) SML increased stocks on hand from $233m as at July 2022 to $468m as at Jan 2023. Why would they do that? Haven't we seen this picture before?  Sinking $235m cash into stock resulted in negative operating cashflows for 1H23 of -$125m...!  Not only is there a cost of holding excess inventory but it also carries a risk of future write downs given the bulk of that increase was finished product which AFAIK has a shelf life. The stock turn ratio will be awful. "And the band played on" ... production boosts efficiency by pumping out ever more product irrespective of downstream sales.

Meanwhile accounts receivable increased while sales fall, and the days sales outstanding ratio will also have blown out. And under note 7 we see a comment about "receivables purchases agreements ... entered into with its bankers".  It appears they have been factoring their debtors which I call the "dance of the desperate...".  This cost them $2.4m in FY22 and $2m in 1H23 for an annualised cost of $4m?! That buys a lot of staff if they didn't factor such debts. Plus I believe there is an exposure to late payment penalties if clients pay the banks late assuming I am reading the FY22 notes correctly......oh dear.

Best not to look too closely under the hood.....

I had a macro look at current cash vs current liabilities and that to mee looks ugly enough. A thorough look through the accounts will  only, as you have pointed out, bring to light the real horror of the situation.

Invetnory is an issues - wheres tehat big internaitnal customer. Are they even in play yet?  Other than that I presume is must be A2 orders.

And whre is Talbot Cheese Factory at - not sure if this has re-opening or not.

And I should check to see how lactoferrin is going because apparently there was real good money to be made there.

Seems people are now taking the time to look under the hood with SP down again to day to $2.05

I reckon there has been an engineering  / design problem with their  new rail sidings. Instead of terminating next to Outwards goods, I reckon they have the freight train arriving smack bang on the middle of the plant at full speed.

[Ferg]

I had a macro look at current cash vs current liabilities and that to mee looks ugly enough. A thorough look through the accounts will  only, as you have pointed out, bring to light the real horror of the situation.

I agree.  I saw that post and you raise a good question around solvency. Cash + debtors at $152m is way below trade and other payables of $423m.  This obviously doesn't bring in inventory but if I were to run the numbers through my cash flow cycle calculator, I know it would not be pretty...maybe I should do that but other tasks have priority at the moment.

The question is how do you turn off production to stop tying up working capital into unsold stock without a) incurring losses on unproductive staff and b) losing the capacity to restart production at the required level of activity after a period of inactivity?  In other words, if you lay off staff to lower production in the short term, can you get them back for the long term?  Oh dear....as you say, where is this new customer? If they came online, would that alleviate the cash and inventory issues?

[winner (n)]

New customer held up because they have to learn how to load a new customer on to the computer system

[winner (n)]

From BusinessDesk all OK if you remain patient-

So, if the demand side of things picks up, the new SAP ERP system runs more smoothly, there are no obstacles with the China registration and the new customer is onboarded, some patience might in fact be warranted.

https://businessdesk.co.nz/article/primary-sector/if-things-pan-out-for-synlait-the-wait-will-be-worth-it

[Basil]

That a big IF
Frankly I am absolutely shocked by their debt situation and their balance sheet looks highly stressed.
Thanks to Ferg we now know that they have been factoring their debtors which is well known as "lending of last resort" and is known to be very expensive.  No wonder there is a lot of talk in their presentation of "stabilizing" the business.

As for people paying 91.5 cents on the dollar for their unsecured December 2024 bonds.  I not sure some investors have a proper handle on the risks of default here.