SML - Synlait

[BlackPeter]

Synlait back at $1.38. All time low again. And time to go until results announcement

Don't think its the next (backward looking) results which might make the difference - more important for them is the future business.

I see two scenarios:

1) They find a customer who needs a product utilizing all this stainless steel they have, and in this case their shares are currently very cheap ... just look at the amazing NTA per share - or
2) They don't.

Not sure however, which of the two scenarios will play out, nor what the odds are.

And yes, I don't like to invest into scenarios where I don't know the odds, particularly if there are others who might do or even be able to influence the odds ...

[Minimoke]

Don't think its the next (backward looking) results which might make the difference - more important for them is the future business.

I see two scenarios:

1) They find a customer who needs a product utilizing all this stainless steel they have, and in this case their shares are currently very cheap ... just look at the amazing NTA per share - or
2) They don't.

Not sure however, which of the two scenarios will play out, nor what the odds are.

And yes, I don't like to invest into scenarios where I don't know the odds, particularly if there are others who might do or even be able to influence the odds ...

Apparently global demand for bog standard milk powder is down and likely to remain down for some time yet.

And one close potential customer has gone and bought their own milk processing plant.

My scenario is reduced demand, increased interest costs, depreciation on all the stainless steel biting, demand from new exciting secret international customer not as high as anticipated, banks looking very closely at accounts.

[Minimoke]

I hope they have a good captain at the helm. Now sailed into previously uncharted territory -  $1.35

[Ferg]

I hope they have a good captain at the helm. Now sailed into previously uncharted territory -  $1.35

Hopefully the uncharted territory and sailing involve clearing the excess stock seen in their last report.  One would also hope SML is not trading while insolvent, otherwise the 'captain' and his mates may end up like Jenny Shipley.

Re-reading the 26 April market update announcement here:
https://www.nzx.com/announcements/410391
I only just noticed the previously reported massive build up of inventory was NOT for the new client.

"Demand coming from Synlait Pokeno's new multinational customer, once commercial production commences, will assist in delivering strong double-digit growth..."

Whiskey tango foxtrot....?

Disclosure: no longer hold, morbidly curious, thank you stop losses....

[Minimoke]

Hopefully the uncharted territory and sailing involve clearing the excess stock seen in their last report.  One would also hope SML is not trading while insolvent, otherwise the 'captain' and his mates may end up like Jenny Shipley.

Re-reading the 26 April market update announcement here:
https://www.nzx.com/announcements/410391
I only just noticed the previously reported massive build up of inventory was NOT for the new client.

Whiskey tango foxtrot....?

Disclosure: no longer hold, morbidly curious, thank you stop losses....

Time for a history lesson.
5 November 2020. Synlait announce "new multinational customer agreement" with "Commercial production is currently projected to start mid-2022." and "Expected to have a positive impact on earnings from FY23"

And to do this "Processing and packaging customization will be required at Synlait Pokeno and Synlait Auckland, with expected capital expenditure of $70 million spread over two years."

As you point out. On 26 April 2023 Synlait say "In addition to the demand reductions and financing and supply chain costs cited above, as previously communicated, Synlait continues to manage several material risks which could impact its year-end performance, including, but not limited to, ........the onboarding timeline for Synlait Pokeno's new multinational customer,...."

And then, as you point out "Demand coming from Synlait Pokeno's new multinational customer, once commercial
production commences..."

So quite clearly this is yet another totally mismanaged project. With well over $70m (I bet they didn't do it on budget) spent, for a mystery multi national client that is at least 1 year, maybe 1 1/2 years behind production schedule. During which time Synlait has carried the development costs and will now be carrying the depreciation for zero revenue.

When the banks did their covenants they were no doubt expecting this new customer to be adding to the bottom line mid 2023 (Synlait did say "Expected to have a positive impact on earnings from FY23") and profitably by end of FY23. This clearly hasn't happened. With no sign of revenue ley alone a positive contribution.

And in the mean time global demand for milk has dropped. In April 2020 it was rosy times with massive increase in demand forecast - heres the chart on prices.

So I reckon they are now in a position where they have spent tons of money for no production and significantly less demand than anticipated.

And the inventory reporting will be interesting. In HY2023 it was value at $467.7m compared with $335.6m prior half year. YE2022 it was $232.9m

[Minimoke]

Oops - heres the chart
You cannot view this attachment.

[Basil]

It's truly sobering to reflect that not that many years ago this was a ~ $13 stock, now all these years later without a single dividend in the meantime its now only ~ one tenth of that.

[winner (n)]

It's truly sobering to reflect that not that many years ago this was a ~ $13 stock, now all these years later without a single dividend in the meantime its now only ~ one tenth of that.

And things were going so good that the Board got a standing ovation at the ASM ....everybody was so happy

But even back then cash flows didn't support the hype eh.

[Basil]

Quite right, as you very astutely pointed out.

[Ferg]

Time for a history lesson.

Nicely done thanks.

So quite clearly this is yet another totally mismanaged project.

Agreed.

...Synlait has carried the development costs and will now be carrying the depreciation for zero revenue.

Yep although they could argue with the auditors the capex is still a work in progress and delay the depreciation start date.

So I reckon they are now in a position where they have spent tons of money for no production and significantly less demand than anticipated

Yep.  "What's the worst that can happen?"

And the inventory reporting will be interesting. In HY2023 it was value at $467.7m compared with $335.6m prior half year. YE2022 it was $232.9m

For sure.  I am waiting for the 'other shoe to drop' with inventory impairments.  IMO this next report is all about inventory*.  But that does raise an issue I mentioned previously: how to stop production while stocks are cleared without destroying the capacity to ramp back up again when needed?  Maybe the impending job shortage might ease that.  Silver lining and all that....or maybe they carry the cost of production staff standing idle or sweeping floors all day.

[edit] *and covenants / cash flow.

[Minimoke]

At current @1.30 market cap is $284m. Which for a mere $227m A2M could take a 100% stake and still have $573m cash left over.

[Nizzy]

Nicely done thanks.
Agreed.
Yep although they could argue with the auditors the capex is still a work in progress and delay the depreciation start date.
Yep.  "What's the worst that can happen?"
For sure.  I am waiting for the 'other shoe to drop' with inventory impairments.  IMO this next report is all about inventory*.  But that does raise an issue I mentioned previously: how to stop production while stocks are cleared without destroying the capacity to ramp back up again when needed?  Maybe the impending job shortage might ease that.  Silver lining and all that....or maybe they carry the cost of production staff standing idle or sweeping floors all day.

[edit] *and covenants / cash flow.

and don't forget the inventory must be sold while its still good food-grade. Buyers don't like WMP older than 6 months of age at time of shipment and SMP 12 months. Quality/flavour issues.   

[Ferg]

and don't forget the inventory must be sold while its still good food-grade. Buyers don't like WMP older than 6 months of age at time of shipment and SMP 12 months. Quality/flavour issues.   

Yep - that is the "inventory impairments" I mentioned earlier.  We saw this exact issue with ATM when daigou trade collapsed and some sales channels were chock full of old stock.

[snapiti]

I remember Fonterra having a very similar inventory issue a few years back, I am not sure how they fixes it but more than likely they found new markets for there products.
The problem with inventory build is cows keep producing milk so you can not turn off the supply of raw product.
SML will want to keep as many raw milk suppliers as possible and probably took on more raw supply to fulfil demand for the somewhat mythical "new international customer".

[Minimoke]

Hells bells. It appear synlait have not been manufacturing A2's stages 1 to 3 of a2MC's current infant milk
formula (IMF) products fro China, Australia and NZ Delivery In Full On Time.

How on earth is this possible. Synlait have the farmers, they have the milk, they have the plant, and as I recall they have an excess of inventory.

What the heck have they been doing?

See today's A2M market announcement - SML yet to respond