SML - Synlait

[Doug]

What's the bet that Bright Dairy would be the underwriter if it comes to a capital raise.

That would be interesting. Given that Bright have about 40% then being an underwriter would almost certainly take them above 50% which would trigger a "Change of control" event for SML010 bonds which entitles bond holders to choose to redeem their bonds which they all would choose to do.

[Hectorplains]

That would be interesting. Given that Bright have about 40% then being an underwriter would almost certainly take them above 50% which would trigger a "Change of control" event for SML010 bonds which entitles bond holders to choose to redeem their bonds which they all would choose to do.

Bright are clearly much more involved than before. Look at the re-financing.  Synlait's new banking syndicate members are ANZ, Bank of China, China Construction Bank, HSBC, and Rabobank. No question who brokered this. 

Immediate capital concerns have eased and Synlait still has world class production facilities and, more importantly, the key licenses. The successful sale of Dairyworks (the disgrace that is Talbot doesn't even get a mention anymore) might get me a little interested...

[Basil]

Agree 100% with your first paragraph...but yes if they can sell dairy works for a fair price then....what's left is a Chinese controlled company with an appalling track record of communication, a culture of extreme wokeism, still saddled with far too much debt, minimal earnings, a soft demand outlook that's never ever paid a dividend and is unlikely too in the foreseeable future.  The icing on the cake is they are almost cast iron guaranteed to be kicked out of the NZX50 in the December rebalance with all the selling by index funds that involves.  Gosh, you'd almost have to have a death wish for your capital to be invested here at this point lol

[Hectorplains]

Agree 100% with your first paragraph...but yes if they can sell dairy works for a fair price then....what's left is a Chinese controlled company with an appalling track record of communication, a culture of extreme wokeism, still saddled with far too much debt, minimal earnings, a soft demand outlook that's never ever paid a dividend and is unlikely too in the foreseeable future.  The icing on the cake is they are almost cast iron guaranteed to be kicked out of the NZX50 in the December rebalance with all the selling by index funds that involves.  Gosh, you'd almost have to have a death wish for your capital to be invested here at this point lol

Haha, I thought that might provoke a rapid response from you!  I'm not writing SML off yet (nor am I leaping to invest either!)

No question they have dug a deep and dirty hole for themselves.  Chinese control is neither here nor there for me. I do like that they're appearing to be a less silent partner though. Debt is obviously their biggest problem.  Earnings and demand are variable.  Abbott represents the possibility of a sustained fillip to both.  However; as you say, the comms around this have been a silent circus.  There may be a low point after the NZX50 index reshuffle and assuming the sale of Dairyworks (and no further filth coming to light) where this is worth some attention.  Lots of milk to flow under the bridge first thou, eh.

[Henry Filth]

If it's come to the stage that New Zealand can't run a dairy company, is there any point in carrying on?

[BlackPeter]

If it's come to the stage that New Zealand can't run a dairy company, is there any point in carrying on?

Fonterra isn't doing that bad I hear. Maybe its not the industry - just a specific board?

[Hectorplains]

Fonterra isn't doing that bad I hear. Maybe its not the industry - just a specific board?

Fonterra IS 80% of the industry.  Last year their financials were good.  However; they have their issues too, not least losing hundreds of shareholding farms every year for the past five years (a drop of 813 since 2019.)  In August they flagged the need for $1B of cost cutting.  Fonterra's share price five years ago was $5.40cps It's now at $2.30.  Fonterra farmers have to buy shares before they can supply milk, so any farmer who bought at around $5-$6 each five years ago have seen their value halved and more.  That's some serious negative equity!

Beyond that: Mataura Valley had to be bailed out by A2. Westland got flogged to the Chinese in a distressed sale. Tatua Co-Operative is the smallest (1%) and the most consistent performer - take what you will from that.  Overall we struggle to do milk well.

[Whome]

Overall we struggle to do milk well.

This statement needs further qualification. Fonterra with the strength of their brands will continue to dominate dairy in NZ. Fonterra was formed by the amalgamation of NZ Dairy and Kiwi Dairy in order to be big enough to compete in supply terms on world markets with the global heavyweights like Nestle, Danone etc.  Farmers could not sell their Fonterra shares by mandate for, I think it was the 1st 10 years following Fonterra's formation. Then following deregulation, a number of new dairy companies started up, and Fonterra again by mandate had to supply milk to those companies at prices allowing them to compete. Strange by todays standards.

Rather than the No. of farmer suppliers, perhaps we should look at the total litres of milk supplied to Fonterra. (Sorry I don't have that figure). It always was expected for a number of suppliers to move to supplying competitor dairy companies. Also farms have continued to be amalgamated into larger acreages with larger herds accounting for some of the decline.

In the last 20 or so years, farm gate returns have ranged from ~$4 to just under $10 per kg ms, always a reflection of the global market demand for milk proteins. So when countries like China are behind that drive in demand, as we have seen with whole milk powder, Fonterra can respond with the highest quality product available anywhere in the world. We NZ citizens benefit hugely from the tax take that demand generates. However like any global market, when the demand slackens as it has recently, we as a small nation get abnormally affected.

In the scheme of things Synlait, A2 and others are minnows, but give them their due for exploiting those niche markets- no one can deny the success of A2 - albeit on the back of a NZ reputation for producing absolute top quality dairy products.
Before anyone jumps the gun in response, there are associated issues to address like too many cows per hectare on Sth Island stoney gravelly soils.

I believe a finger can be pointed towards over exuberant or questionable competent company management at times, witness Synlait's recent years of debt management, or Fonterra's China debacle that was Beingmate, or Westland's drive to be one of the specialty products suppliers for lactoferrin when the market was already over supplied.

It's not often I sing praises for Fonterra, but if it were not for their farmer supplier owned co-operative structure which only allows company share ownership (not withstanding FSF shares) if you are a supplier of milk to Fonterra, then we would have seen the company taken over by the likes of Nestle who would love to have got their hands on all that stainless steel. The monopoly position would have turned NZ dairy farmers into peasant farmers forced to accept marginal payments for their milk, and all of NZ left worse off as the profits went off-shore. Co-ops have their problems but they also have benefits in this case to NZ dairy farmers.

Overall do we struggle to do milk well - yeah, nah, it's called the market.

[Hectorplains]

This scathing Article , albeit seven years old is still relevant and it negates much of what you're arguing.  Fonterra was actually formed to address the swings in commodity prices in "the market."  The remedy was to be in 'new revenues' for value added products.  The outcome though has been more intensive dairying and an acceleration in production of low-value products, mostly milk powder.  The innovation as you rightly point out has come from A2 and others, not Fonterra.

I don't agree with your dystopian extrapolation of a foreign take over of Fonterra turning NZ dairy farmers into peasant farmers forced to accept marginal payments for their milk. There were other ways to protect farmers and New Zealand interests.  A takeover was not guaranteed, and if one was forthcoming it would be highly unlikely to have received approval.  The measure of Fonterra's success, or otherwise, is not on what it may have prevented but on what it has actually achieved.  It has not achieved what it was set up to do.

[Whome]

I didn't see Tony Baldwin's article as scathing at all, more a balanced account of what happened or failed to happen over the years. His account is no surprise given that he was far closer involved with the process. I was trying to give a potted history as I remembered the arguments for and against the formation of Fonterra some 14 years before that article was written, and at that time the prospect of an eventual takeover by a major multinational was very much to the fore. Could have been scare tactics to influence the farmer vote - who knows?

What does come through in the article is the difficulty Fonterra has in raising capital from the international money lenders who are wary of companies with multiple owners which is what a co-op is; too hard to get owner consensus on major change proposals that require multiple meetings of owners - still the case today. This limits Fonterra's ability to raise capital; essentially can only raise capital from its shareholders.

Appreciate the link to Tony Baldwins interesting article.
Time to return the thread to Synlait matters.

[xafalcon]

This statement needs further qualification.

Overall do we struggle to do milk well - yeah, nah, it's called the market.

I have worked in the NZ dairy industry (management) for over 30 years. Anchor Products (NZ dairy = half of fonterra), Tatua, DGC. And I have had extensive business, procurement and auditing relationships with Fonterra,  Westland, Open Country and Synlait

The problems with Fonterra are

- price taker (through GDT), not a price setter
- mainly a commodity player, so little customer loyalty
- does not own many "brands", and brands are where the real money comes from through....... brand loyalty
- not user-friendly to deal with
- lack of value-added products (with corresponding brands)
- has been reducing head count for two decades at the expense of new product development and quality
- way too many eggs in one basket (China)
- poor CEO selections (Theo Speirings, Craig Norgate, the Canadian sugar guy who's name escapes me)
- poor director selections (they should have addressed CEO non performance)
- terrible investment decisions (Australia, Uruguay, Argentina, Sri Lanka etc etc)
- successive bad ERP software selections and implementations

The enabling legislation (DIRA) that allowed fonterra to form, was written by fonterra and agreed to by dairy farm owners. It is not the reason why fonterra has failed, they mismanaged themselves into failure

[winner (n)]

Andrew Ferrier was the Canadian who was CEO of Fonterra earlier this century

[Hectorplains]

From yesterday's Herald. While it's a Fonterra focus, some of the points are also in play for Synlait.

[Hectorplains]

Global dairy auction tonight .  The Futures market is suggesting rises across all the categories.  At the top end ANZ are tipping 5% plus, while at the bottom Westpac reckon on 1%.  Prices were up 4.6% in the previous auction a fortnight ago, with the key whole milk powder up over 4.6%   

The talk is of concern around milk supply as early season NZ milk production is down 2.1%,  with the  forecast El Nino weather pattern likely to restrict supply further.  It looks like August was bottom for prices. The longer term view is more positive with Chinese demand rebounding from 2024. That demand will allow Synlait to move inventory more quickly. Another duck, that while not yet lined up, is at least not floating upside down in the pond.

[Teitei]

One of the best risk-adjusted fixed interest investments in the market has to be the SML 2024 bonds imo.

I have quietly picked up a parcel in recent times and believe that those who bought the bonds at 3.83% pa yield and sold out at up to 18% pa have not thought through the strategic nature of SML to Bright Foods and ATM.

Both would be very happy to take out the company completely at around current valuations (sp $1.43 vs NTA of $3.21) which could yet happen if SML makes a heavily discounted rights issue, underwritten by the principal shareholders.

Do the bondholders have any idea how long (& geopolitically difficult) it takes for a China company to build up a primary sector player like SML?

There will be a time to play SML shares - the major risk now being the NZX re-indexing in Decemeber.