SML - Synlait

[Basil]

Balance sheet is an absolute shocker though mate with not as steady regular monthly subscription income as SKY.   Could be worth a punt at 50 cents on the dollar.  Binary outcome though, they go into receivership you lose, they execute a major transaction or get recapitalized you win. Just a thought regarding this sort of punt.  You get a quicker outcome on the roulette wheel at Sky City though, although their "brokerage rate" is a bit higher
Bonds - ARV010 trading at 82 cents on the dollar, yields to maturity 7.2% look a MUCH safer bet to me.   

[Minimoke]

Some wee odd things in accounts.
$69,000 loss on livestock sales. I didn't know SML were in the cattle business.

Inventory at 31 July 2022 = $233m. Inventory six months later at 31 Jan 2023 = $468m

Current liabilities at 31 July 2022 = $59m. Six months later at 31 Jan 2023 = $351m

Net cash flow out 31 Jan 2023 = $125m. Net cash flow in 31 Jan 2022 =  $117m

Cash on hand at 31 Jan 2023 = $12.4m. Accounts Payable = $423m. Accounts receivable = $140m

Employee and contractor cost for 6 months = $74.7m. = $12.45m a month. See cash on hand above.

On 21 February 2023 the Group's SAMR license, which allows it to produce China label infant formula for sale by
The A2 Milk Company, expired. Re-registration a production due to recommence Q4 2023

[Minimoke]

Someone is shopping. 5,842,690 crossed at $1.40  then followed by another 300,000 at $1.40 That's 2.8% of the company

[KW]

A2M can't let SML fail coz of the Chinese SAMR registration

Everyone assumes that A2M will step up to bail out SML.  But what if it can't?  What if SML takes A2M down with it?  What would A2M look like without an infant formula business?

[Buzz]

Everyone assumes that A2M will step up to bail out SML.  But what if it can't?  What if SML takes A2M down with it?  What would A2M look like without an infant formula business?

Bright Diary are the major shareholder at 39%, with A2 Milk about 19%, combined they have about 58%. The next largest shareholder is about 3%. A2 would probably fail if Synlait failed, as they have no other large supplier yet. Notwithstanding the SAMR, it would seem reasonable that neither Bright Diary nor A2 Milk have any vested interest in Synlait failing. In fact one might suggest that they have a strong vested interest in ensuring it doesn't fail, even if that meant shoring up the balance sheet and taking a larger stake in the company, potentially even a combined takeover. A2 has plenty of cash on hand, they could do it by themselves at current market cap, whereas Bright Diary has unlimited money, if you look at who owns them. So it comes down to vested interest. All this though, is on an assumption that Synlait might fail without a benevolent benefactor, and that's not certain by any means.

[Breezy]

Bright Diary are the major shareholder at 39%, with A2 Milk about 19%, combined they have about 58%. The next largest shareholder is about 3%. A2 would probably fail if Synlait failed, as they have no other large supplier yet. Notwithstanding the SAMR, it would seem reasonable that neither Bright Diary nor A2 Milk have any vested interest in Synlait failing. In fact one might suggest that they have a strong vested interest in ensuring it doesn't fail, even if that meant shoring up the balance sheet and taking a larger stake in the company, potentially even a combined takeover. A2 has plenty of cash on hand, they could do it by themselves at current market cap, whereas Bright Diary has unlimited money, if you look at who owns them. So it comes down to vested interest. All this though, is on an assumption that Synlait might fail without a benevolent benefactor, and that's not certain by any means.

Thanks for your sensible post, lots of scaremongering on here.

[ShiningStar]

Bright Diary are the major shareholder at 39%, with A2 Milk about 19%, combined they have about 58%. The next largest shareholder is about 3%. A2 would probably fail if Synlait failed, as they have no other large supplier yet. Notwithstanding the SAMR, it would seem reasonable that neither Bright Diary nor A2 Milk have any vested interest in Synlait failing. In fact one might suggest that they have a strong vested interest in ensuring it doesn't fail, even if that meant shoring up the balance sheet and taking a larger stake in the company, potentially even a combined takeover. A2 has plenty of cash on hand, they could do it by themselves at current market cap, whereas Bright Diary has unlimited money, if you look at who owns them. So it comes down to vested interest. All this though, is on an assumption that Synlait might fail without a benevolent benefactor, and that's not certain by any means.

Excellent post thank you

[Minimoke]

Bright Diary are the major shareholder at 39%, with A2 Milk about 19%, combined they have about 58%. The next largest shareholder is about 3%. A2 would probably fail if Synlait failed, as they have no other large supplier yet. Notwithstanding the SAMR, it would seem reasonable that neither Bright Diary nor A2 Milk have any vested interest in Synlait failing. In fact one might suggest that they have a strong vested interest in ensuring it doesn't fail, even if that meant shoring up the balance sheet and taking a larger stake in the company, potentially even a combined takeover. A2 has plenty of cash on hand, they could do it by themselves at current market cap, whereas Bright Diary has unlimited money, if you look at who owns them. So it comes down to vested interest. All this though, is on an assumption that Synlait might fail without a benevolent benefactor, and that's not certain by any means.

Any company that only has enough cash to pay next months wages surely has to be on the brink?

[Buzz]

Any company that only has enough cash to pay next months wages surely has to be on the brink?

But they have debt headroom as well. I'm not defending Synlait, just saying that it's not in bright's or a2 interest to see them fail. Quite the contrary.

[Breezy]

But they have debt headroom as well. I'm not defending Synlait, just saying that it's not in bright's or a2 interest to see them fail. Quite the contrary.

Yes exactly, it won't fail, it will get bailed by one or two parties if it comes to the crunch.

[Buzz]

Let's revisit that debt headroom comment about 1 Aug shall we?

For sure, let's revisit it then, it's not like I'm queueing up to buy Synlait right now, it looks like a mutt, but to ignore A2 and Bright's interests in not letting Synlait fail, might be missing an opportunity.

[BlackPeter]

For sure, let's revisit it then, it's not like I'm queueing up to buy Synlait right now, it looks like a mutt, but to ignore A2 and Bright's interests in not letting Synlait fail, might be missing an opportunity.

True.

On the plus side - they have one (or two, or three) well equipped and quite modern milk powder factories. I assume as well that by now they know how to handle the canning line ;
They do have as well a loyal group of A2 milk suppliers (for what this is worth), and I think some of their farm management programs improve not just the environment but as well the worth of their brand.

On the not so positive side - they have clearly balance sheet issues - all this stainless steel is expensive, and they funded too much of it with debts. Interest rates start to bite.
Their board proved more than once that they are not fit to govern the company - terrible risk management (all eggs into one basket), terrible recruitment decisions (do you want pink with that), funny governance priorities (ESG needs to go with profitability, not against) and allowing debts to be pushed to the hilt again and again provide plenty of evidence for that.

So - clearly, they should be salvable, even if I am currently not sure what the value would be for another non growth milk powder producer in NZ - but, it will have a positive value.

What I am not sure is - given that Bright Dairy and ATM together can control the board at any stage they want (holding together nearly 60% of the shares - i.e. AGM votes) and could do so already for many years, and given that Bright dairy alone is in practical terms controlling the board, why didn't they fix the company a long time ago?

I guess either they are not as smart as they look, or they (Bright) might have an hidden agenda which might not be aligned with the agenda of ordinary retail investors.

Whatever it is - I am sure we can't rule out a white knight yet, but I am not sure I would count on him appearing in time.

[Minimoke]

I disagree that they have debt head room. Heres my numbers - please feel free to correct me

Seems to me they have debt facilities of $676.7m today. And this reduces to $596.7m on 30 June 2023

From this they have taken up $531m.

So head room is feasibly +$65.7m

However, they also currently have $423m in accounts payable. Lets say they are on 60 day terms ie have to be paid by end of June.

They can counter this with $140m in receivables and lets say these should all be received by 30 June.

That head room, at end of June now appears to me to be -$325m.

And of the $596.7m $416m is secured. The $180m bond holders isn't.

So, seems to me they need at least another $325m. And pretty jolly quickly. And even if I won lotto I would not be putting it into the bonds.

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[Minimoke]

For sure, let's revisit it then, it's not like I'm queueing up to buy Synlait right now, it looks like a mutt, but to ignore A2 and Bright's interests in not letting Synlait fail, might be missing an opportunity.

Howabout if they let it fail. Clear the debts. And then A2m write off their current investment (got to be some tax benefits there) and then come in and buy some shiny stainless steel and SAMR license at bargain prices. And come up with some supply agreement for Bright Dairy interests.

[Minimoke]

Someone is shopping. 5,842,690 crossed at $1.40  then followed by another 300,000 at $1.40 That's 2.8% of the company

So. Who has sold out?
Bright 39.01%
A2Milk 20.19%
Unknown 3.36%
ACC 2.68%
John Penno 2.34%

Rats and mice after that