SML - Synlait

[Ferg]

Following on from Minimoke's post #696.....page 9 of the auditors section of the interim report states:

The successful execution of an equity raise in combination with other deleveraging options by 31 July 2024...is critical to the ability of the Group to continue trading as a going concern.

So shareholders will have to bail out the bankers.  By 31 July.  Dilution incoming.....

Also the bankers have been busy as expected:

• $130m loan prepayment due on 28 March 2024 extended to 15 July 2024
• shareholder funds covenant reduced from a requirement of $600m to $400m
• interest coverage ratio reduced from a requirement of 2.25x to 1.75x for 31 July 2024 test

But, whilst the can has been kicked down the road for now.....other issues still loom:

The working capital facilities expire on 1 October 2024 and will require refinancing.

And this paragraph is particularly sobering:

Without successful execution of an equity raise in combination with other deleveraging options by 31 July 2024, the Group will be in breach of its banking covenants and the banking syndicate will have the right to call on the full $410m of outstanding bank debt. The Supervisor for the $180m subordinated bond will also have the right to call on the bond which will become repayable on demand immediately due to the bank facilities being in default. The loss of support from the Group's banking syndicate due to the above commitments not being met resulting in the facilities and bond being called as well as the inability to refinance longer term debt would result in significant adverse effects on the Group, including the ability for the Group to remain a going concern.

If you understand the ramifications of that paragraph, then you would not invest or you would immediately divest.  If you do not understand the ramifications of that paragraph, then you should not invest in anything on the share market.

As Minimoke said : "Totally uninvestable".

On the positive side of the ledger, the CEO has this to say:

The balance sheet reset initiatives are underpinned by a letter of support from our largest shareholder, Bright Dairy. Bright Dairy's support, coupled with the banking amendments, offers Synlait additional stability, and confirms that our largest shareholder and our banking syndicate remains very supportive.

Not advice.  DYOR.

[winner (n)]

I asked that guy AÍ if Synlait were going bankrupt

Based on the information provided in the Synlait Half Year 2024 Results, there is no indication that the company is going bankrupt. They are actively working on resetting the company to achieve strategic objectives, reduce debt levels, and have received support from their largest shareholder and banking syndicate. While facing challenges, they are focused on key growth areas and have initiatives in place to improve financial performance.

[Toddy]

What they really need is a letter of support from their Farming Suppliers. But they would never get it.

It's a perfect mess.

At what price would the current shareholders tip more money in. 50 cents per share still sounds too expensive.

I don't know anyone who owns shares in SML. Everyone had plenty of time to sell out over the years.

[Minimoke]

What they really need is a letter of support from their Farming Suppliers. But they would never get it.

It's a perfect mess.

At what price would the current shareholders tip more money in. 50 cents per share still sounds too expensive.

I don't know anyone who owns shares in SML. Everyone had plenty of time to sell out over the years.

Lets look at some hard cold facts.

Synlait report net debt as being $559m.

They have 218.5m shares

Lets say they go for a strategy of completely clearing debt. Well that ends up being $2.56 per share needing to be raised. Well - that's never going to happen

To get shareholders to stump up $0.50 pt share they are only going to reduce debt by approx $111.8m. The banks want at least $130m

So. Lets round it of at $0.60 contribution per share they can see the bankers clear of their $130m

Now we have those pesky bond holders that must be paid in December. That requires another $0.82 to be realised per share. Bringing the total to $1.42 per share to clear the immediate pressing debt.

Shares are currently trading at $0.68.

It seems to me to be utter bonkers to think that shareholders will bail Synlait out

But lets say the shareholders do stump up $1.42 a share. That still leaves $249m of debt. In a company that is inherently unprofitable with over capacity.

And according to Newsdesk losing 50 farmer suppliers. Which makes me wonder what they have done to annoy the farmers. Afterall the stainless steel processing plant is going nowhere.

Which begs the obvious question. Why would anyone throw good money after bad.

[Minimoke]

Now lets look at Bright.

Synlait have reported that they  have "a letter of support from our largest shareholder, Bright
Dairy" and this letter includes "The letter includes "a commitment to participate in a future equity raise and to extend a loan at the request of Synlait, subject to Synlait and Bright receiving all necessary approvals."

Bright hold 85.266m insahers. So say they stumped up $0.5o a share this would only raise $42.6m

So to get the bankers $130m off synlait back, bright would need to come up with $1.52 a share.

Someone else can do the math for me, but say this  is done for some euity swap, there wil be some massive sahre dilution coming up. To a point you'de have to wonder why the other 60% of shareholders would agree. They are probably better off trying to quit there shares at today's corrent value of $0.67. If they could find buyers  of course.

And Bright say they could provide a loan. But what would be used as collateral. Profitable Dairyworks is for sale and may be gone soon. Looks like Pokeno is going on the block as well. Which really only leaves Dunsandel.

Which brings us back to "all necessary approvals" - whatever that means.

I still see liquidation as the best and only option. Whose going to change my mind?

[Basil]

Not me mate, I think you've summed up the challenges facing the company and bondholders very well.  What we have here is a litany of very poor decision making, poor governance, inadequate disclosure...the Pokeno development has been a train wreck from beginning to end, a board and management focused on all things ESG, LGTBQ and whatever other feel good garbage that's currently on trend. Worse, there appears to be no way they can continue without selling all their north island assets and Dairy works as well as a capital raise.
Remembering they have completely squandered the last $200m they raised a few years back at $5, why on earth would you back the current management and board with fresh capital knowing they have displayed such truly appalling skills with managing resources before and also knowing that from an operational point of view, going forward after all the above, they are still in a litigious situation with what will ostensibly be their sole remaining customer and supplying at half the previous margin ?

I'm all for picking the mutt with the least fleas but what we have here is a mutt with metastasized cancer, allowed to spread by a totally incompetent board and management and no amount of flea powder fixes that.

[Minimoke]

In an earlier post back in February I ran some number on A2 buying SML at a premium on the share price at the time.

But let's revisit the idea.

At today's current SP of $0.67 SML is worth $146.450m To keep it simple let's call A2's holding worth 20% or $29.29m

Based on the lastest news I don't think there is any reason at all to justify an offer at a premium.

So lets say A2 offers $0.67 to existing shareholders. A2 would need to stump up with $117.160m

A2's current cash on hand sits at $792m. So buying SML, A2 would deplete this to $674.84m.

And realistically A2 would need to keep the bankers happy and chuck them $130m. So this would leave A2 with $544.84m cash on hand.

Now lets say they need to keep Bright happy. They could offer Pokeno lock stock and barrel for $100m. A2 now has $644.84m cash

And say A2 can flog off Dairy works for $80m. Now gives them $724.84m cash on hand

So for essentially $67.16m A2 buys Dunsandel, SAMR license, Production at zero margin and Canning / blending facilities (something they have earmarked $120m for at Mataura)

Of course they have to do something with the $180m worth of bonds. But even if they pay these back without a further bond issue A2 is still left with $544 in the bank

Convince me this isn't a cunning plan! (oh and while I have written this SP has dropped back to $0.65. Be in quick for this once in a life time offer)

[Poet]

I imagine that if sml enters liquidation it would trigger an automatic and immediate right for milk suppliers to move to alternative buyer (fonterra)
Dunsandel wouldn't be worth a hill of beans to any new owner without supply in place.
So a2m or bright might need to be very wary of receivership path.
Also there isn't any guarantee that a2m and or bright would be the only potential buyers of assets after a receivership.

[Minimoke]

I imagine that if sml enters liquidation it would trigger an automatic and immediate right for milk suppliers to move to alternative buyer (fonterra)
Dunsandel wouldn't be worth a hill of beans to any new owner without supply in place.
So a2m or bright might need to be very wary of receivership path.
Also there isn't any guarantee that a2m and or bright would be the only potential buyers of assets after a receivership.

That would be dependent on Fonterrs ability to process. I have no idea if they are running at such low capacity that they could take on Synlaits farmers.

Anyway, Synlait farmers must love the B Corp and ESG stuff Synlait has been up to. (Otherwise why would Synlait bother?). That said Fonterra do offer the Rainbow Tick. Maybe Synlait haven't been trying hard enough.

[Minimoke]

No buyers for those bonds now. Good luck to holders. I wouldn't pay 10 cents on the dollar for them now.  This is. now all about the odds you will get your money back, not the return on your money through to Dec 2024. Even 150% yield is 42 cents on the dollar which would be "incredibly brave" It will be interesting if anyone is prepared to speculate at about that level. That,s nearly $2.50 back for each dollar gambled... note the choice of word, gambled, not invested.

Go on. You know you want to. 50% today!

[Basil]

Go on. You know you want to. 50% today!

LOL I don't have a death wish for my capital.

[Minimoke]

LOL I don't have a death wish for my capital.

Someone does. Now at 51%

[Basil]

Hope Teitei not buying more for his own sake.  First rule of investing, when you're in a deep dark hole with little prospect of climbing out, whatever you do, don't keep digging !  51% is still 74 cents on the dollar for those deeply subordinated unsecured bonds.  Paying that much for them is absolute madness in my opinion.

[Minimoke]

In an earlier post back in February I ran some number on A2 buying SML at a premium on the share price at the time.

But let's revisit the idea.

At today's current SP of $0.67 SML is worth $146.450m To keep it simple let's call A2's holding worth 20% or $29.29m

Based on the lastest news I don't think there is any reason at all to justify an offer at a premium.

So lets say A2 offers $0.67 to existing shareholders. A2 would need to stump up with $117.160m

A2's current cash on hand sits at $792m. So buying SML, A2 would deplete this to $674.84m.

And realistically A2 would need to keep the bankers happy and chuck them $130m. So this would leave A2 with $544.84m cash on hand.

Now lets say they need to keep Bright happy. They could offer Pokeno lock stock and barrel for $100m. A2 now has $644.84m cash

And say A2 can flog off Dairy works for $80m. Now gives them $724.84m cash on hand

So for essentially $67.16m A2 buys Dunsandel, SAMR license, Production at zero margin and Canning / blending facilities (something they have earmarked $120m for at Mataura)

Of course they have to do something with the $180m worth of bonds. But even if they pay these back without a further bond issue A2 is still left with $544 in the bank

Convince me this isn't a cunning plan! (oh and while I have written this SP has dropped back to $0.65. Be in quick for this once in a life time offer)

I came up with this cunning plan on 22 Feb when SP was $0.70. And I reckoning a premium of say 25% brought the price to $0.875.

Today SP closed at $0.62. Minor shareholders really need to get in touch with A2M and get them to take up my plan before they lose even more.

[Basil]

The fly in the ointment is that ATM and SML management stopped talking some time back and only talk through their lawyers now.