SML - Synlait

[Basil]

Pretty spectacular train wreck playing out in ultra slow motion...hard not to rubberneck and watch...so many free lessons about what not to do in business.

[Minimoke]

Pretty spectacular train wreck playing out in ultra slow motion...hard not to rubberneck and watch...so many free lessons about what not to do in business.

Bonds now 85%. Tempted?

[Basil]

Bonds now 85%. Tempted?

Not even in the slightest.  At very best a 50/50 chance to get full repayment of bonds in my view, (probably a LOT lower than 50%) and to get to 50 cents on the dollar pricing last time I looked, the yield on these short duration bond needs to be 135%.

The way I am looking at the bonds is this.
They are deeply subordinated and only rank ahead of equity but because the whole situation is so clouded and uncertain and the realizable value of assets unknown it's probably better to think of them along the lines as ranking equally in security to equity.  That line of thinking centers around a binary all or nothing outcome which is what I see as the most likely outcome here.  My view is at this point the relative pricing on a risk reward basis, suggests the shares are better buying than the bonds.  That said, just because one class of investment is arguably vastly overpriced (bonds) for the extreme risks apparent, doesn't of itself make a case for investing in the alternative, SML shares.

If we look at the share price at 48.5 cents that's just 15% of NTA which according to Jarden's website is $3.23.  That underpins my thinking that the true value of the bonds in the current, (ostensibly binary future event horizon), environment is probably somewhere between 10-20 cents on the dollar, perhaps towards the top end of that given they technically rank ahead of equity.  Just for the sake of interest, (excuse the pun), I loaded up a draft order for 10,000 bonds at a 500% yield at it came to 14.7 cents on the dollar.  Could be worth a very small punt on the off chance it ever goes that high.

There's still quite some time before any possible resolution to their insolvent position and I expect that yield to track inexorably higher in the meantime.  I'd wager it will be well over 100% before the end of May.

[snapiti]

A very prudent post on the other channel about farmers giving notice to SML of change in supply.
Now if you fully understand dairy farming you would expect this to be happening.
I know if I was a dairy farmer and supplied SML I would be changing to Fonterra as soon as my contract allowed.
I would suggest this is the last nail in the coffin for SML.
I know A2 supply is somewhat different but you have to wonder about A2M share price should SML fall over(for the record I don't think it will completely fall over but will require a rescue package which won't support the current SP)

[Minimoke]

A very prudent post on the other channel about farmers giving notice to SML of change in supply.
Now if you fully understand dairy farming you would expect this to be happening.
I know if I was a dairy farmer and supplied SML I would be changing to Fonterra as soon as my contract allowed.
I would suggest this is the last nail in the coffin for SML.
I know A2 supply is somewhat different but you have to wonder about A2M share price should SML fall over(for the record I don't think it will completely fall over but will require a rescue package which won't support the current SP)

The reasons SML is losing farmers is something that should be explored.

I suspect (with no evidence) that Synlait ESG requirements are too onerous on Farmers. Also Synlaits reckless drive into debt has seen their ability to pay competitive farm gate prices diminished. Clearly something is failing with farmer relations. 

Dunsandel has value as stainless steel only for so long as it can get milk pumped through it. If A2 milk isn't going through there then its going to sit on the Canterbury plains as a decaying monument to Penno and Richardson egos. Fortunately A2 also has agreements with Fonterra - so the thing at risk remains the China Label

As for Pokeno - that appears to be an unmitigated disaster. Right from the very beginning with the dodgy land purchase, the covenant issues, the mystery "major international customer" (who still hasn't been named by Synlait) the sale of Auckland assets and now it appears the exodus of farmers.

My cunning plans (in posts below) did hinge on value in the stainless steel assets based on an assumed supply of milk. In light of information coming out that farmers appear to be leaving I think I may have over valued the purchase prices and split off of Pokeneo/Dunsandel to Bright and A2's mutual benefits.

[Minimoke]

The other, more pressing date, we should keep an eye on is 17 June.

This is the date the next interest payment on bonds is due.

This is $1,723,500.

Now this may not seem like a large amount of money. But it needs to be put in context.

As at 31 Jan, Synlait had $139,781,000 in cash and receivables. Which might seem like loads of loot to handle day to day operations and upcoming things like interest payments.

However they had trade and other payables of $286,634,000 in immediate trade and other payables.

This leaves a daily operating cash flow shortfall of $146,853,000. Soon they will be adding another $1,723,500 to this hole.

So what is Synlait to do? Well essentially they have to start running a ponzi scheme.

They have to convince new punters to loan them money so they can pay debts due to other punters. This will give those original punters a sense of security that their original loans are safe as houses.

Elsewhere there are other punters (banks) who are already up to their eyeballs in risk - and they are likely to have little appetite to lend more so that others can get paid off first.

So keep an eye out on activity before 17 June!

[snapiti]

I don't think the 17th bond interest payment will be a problem....when companies are in this much shit they tend to prioritize what they choose to pay, trade debt/suppliers are usually the last to get paid, or in this case may not get payed at all.
I think JP resigning is another big sign of what is going on behind closed doors.
Really the biggest worry for the company going forward, even if it is saved, will be dairy farmers changing to Fonterra as they no longer have confidence in SML.

[Minimoke]

I don't think the 17th bond interest payment will be a problem....when companies are in this much shit they tend to prioritize what they choose to pay, trade debt/suppliers are usually the last to get paid, or in this case may not get payed at all.
I think JP resigning is another big sign of what is going on behind closed doors.
Really the biggest worry for the company going forward, even if it is saved, will be dairy farmers changing to Fonterra as they no longer have confidence in SML.

Troubled relationship with your bankers

Trouble relationship with your biggest customer

Troubled relationships with your raw material suppliers.

As I said earlier, Synlait is totally uninvestable.

[BlackPeter]

I don't think the 17th bond interest payment will be a problem....when companies are in this much shit they tend to prioritize what they choose to pay, trade debt/suppliers are usually the last to get paid, or in this case may not get payed at all.
I think JP resigning is another big sign of what is going on behind closed doors.
Really the biggest worry for the company going forward, even if it is saved, will be dairy farmers changing to Fonterra as they no longer have confidence in SML.

Not sure it is so easy - farmers moved from Fonterra to Synlait because it freed up their capital (remember - Fonterra requires their farmers to hold a number of their shares proportionally to their milk production, Synlait does not).

Any farmers who wants to return needs to buy back Fonterra shares ... and while Fonterra did well this year, they had a lot of dry years before. Returning farmers might well experience a double whammy of needing to buy Fonterra shares while they are dear which then return to their previous dismal performance.

Anyway - interesting times for our agricultural sector. If we manage to throttle our dairy production that way, our environment might be the big winner!

[Minimoke]

Will we see a sad but momentous event today?

SP is currently at $0.46.

Next bid is at $0.455. If a sale goes through at this level the market will now value Synlait at less than $100m

[snapiti]

good point BP, I will add a farmer needs his milk picked up every day(and payed for it) some risk for those supplying SML at the moment.
They can't just pick up the phone and get another company to collect if SML go belly up

[Sideshow Bob]

good point BP, I will add a farmer needs his milk picked up every day(and payed for it) some risk for those supplying SML at the moment.
They can't just pick up the phone and get another company to collect if SML go belly up

I'm sure the industry would rally to the farmers aid if that did become the case. Peak flows might be a little harder. Especially those who have signaled to move and already discussed with an alternate processor....

[Minimoke]

good point BP, I will add a farmer needs his milk picked up every day(and payed for it) some risk for those supplying SML at the moment.
They can't just pick up the phone and get another company to collect if SML go belly up

When you look at Accounts Payable vs Account Receivable you can see why farmers would be very concerned.

[Minimoke]

And there we have it> SML worth less than $100m
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[Breezy]

And there we have it> SML worth less than $100m
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Well yes by market cap but would someone be able to buy the whole outfit for under 100 mill, not very likely.