SML - Synlait

[Minimoke]

In January Synlait announced a forecast milk price for 23/24 of $7.50

In March Fonterra had a farm gate forecast of $7.50 - $8.30. When they announce this week it is expected to be at $8.00 or over.

Westland Dairy pay $0.10 more than Fonterra.

So the question is: How much will Synlait pay to keep their farmer suppliers happy. And how will they pay for this increased cost.

[Sideshow Bob]

Would at least think they are selling inventory into an improving market??

Straws clutching at.....

[Minimoke]

In January Synlait announced a forecast milk price for 23/24 of $7.50

In March Fonterra had a farm gate forecast of $7.50 - $8.30. When they announce this week it is expected to be at $8.00 or over.

Westland Dairy pay $0.10 more than Fonterra.

So the question is: How much will Synlait pay to keep their farmer suppliers happy. And how will they pay for this increased cost.

Fonterra announcment today

Opening forecast Farmgate Milk Price for 2024/25 season: $7.25-$8.75 per kgMS with a mid-point of $8.00 per kgMS
• Current season forecast Farmgate Milk Price: midpoint maintained at $7.80 per kgMS, range narrowed to $7.70-$7.90 per kgMS

[Minimoke]

Fonterra announcment today

Opening forecast Farmgate Milk Price for 2024/25 season: $7.25-$8.75 per kgMS with a mid-point of $8.00 per kgMS
• Current season forecast Farmgate Milk Price: midpoint maintained at $7.80 per kgMS, range narrowed to $7.70-$7.90 per kgMS

Synlait today confirms its forecast base milk price for the 2023/2024 season at $7.80 per kgMS. And opening forecast for the 2024/2025 season is $8.00 per kgMS.

So farmers can't be deserting Synlait on the basis of revenue.

[Minimoke]

Listing Rule 5.1.1 Disposal or Acquisition of Assets

5.1 Disposal or Acquisition of Assets
5.1.1 An Issuer must not enter into any transaction, or a related series of transactions, to
acquire, sell, lease (whether as lessor or lessee), exchange, or otherwise (except by
way of charge) dispose of assets where the transaction or related series of
transactions:
(a) would significantly change, either directly or indirectly, the nature of the
Issuer's business, or
(b) involves a Gross Value above 50% of the Average Market Capitalisation of the
Issuer,
unless the transaction, or related series of transactions, is:
(c) approved by an Ordinary Resolution, or a special resolution if approval by way
of special resolution is required under section 129 of the Companies Act 1993,
or
(d) conditional upon such approval required by paragraph (c) above.


SML now have a waiver to this rul on the basis of

"due solely to the recent material deterioration in SML's share price, contracts which are regularly
entered into by SML (and have been for many years as part of its ongoing operations) are now
being caught by Listing Rule 5.1.1. SML's shareholders have never previously been required to
approve these business as usual contracts, and the non-interested directors of SML do not
consider SML's shareholders would expect to have to approve those types of contracts, being
contracts for the sale of its manufactured goods (or for the supply to it of materials to allow the
manufacture and sale of those goods). There is also potential that certain counterparties would
express concern with details of the business as usual contracts being included in a notice of
meeting, such that certain Relevant Contracts may not be entered into if they were subject to
SML shareholder approval;

I'm not sure what to make of all that. But given they have applied for a waiver it can't be good news because its not business as ususal.

[Ferg]

I'm not sure what to make of all that. But given they have applied for a waiver it can't be good news because its not business as ususal.

I suspect, and I'm guessing here, their normal sales of inventory to ATM would be considered "a related series of transactions" to sell assets (being inventory) with "a Gross Value above 50% of the Average Market Capitalisation" which means ongoing sales of stock to ATM are now caught by this clause.  They also state:

contracts which are regularly entered into by SML (and have been for many years as part of its ongoing operations) are now being caught by Listing Rule 5.1.1. SML's shareholders have never previously been required to approve these business as usual contracts...[snip]....being contracts for the sale of its manufactured goods

which I think confirms it.

IOW it's an unintended consequence of a low market cap.

[Minimoke]

I suspect, and I'm guessing here, their normal sales of inventory to ATM would be considered "a related series of transactions" to sell assets (being inventory) with "a Gross Value above 50% of the Average Market Capitalisation" which means ongoing sales of stock to ATM are now caught by this clause.  They also state:
which I think confirms it.

IOW it's an unintended consequence of a low market cap.

Thanks. So Basically $50m worth of inventory for A2. Intersting accounting. This I presume would be finished goods. But may not include Work In Progress or raw material on hand.

Either way its cut, it is clear A2 is by far their largest customer. By a large margin. And not Bright related parties

[Basil]

According to Reuters a few minutes ago.

Synlait Milk Says Bright Dairy To Provide NZ$130 Million Facility
Reuters • BRIEF • 7 minutes ago
●BRIGHT DAIRY TO PROVIDE NZ$130 MILLION FACILITY
●AGREED ON TERMS OF A NZ$130 MILLION SHAREHOLDER LOAN WITH BRIGHT DAIRY
●NOW FORECASTING IT IS UNLIKELY TO MEET THREE OF ITS CURRENT BANKING COVENANTS AS AT 31 JULY 2024
●EXPECTS TO DRAW DOWN FULL NZ$130 MILLION TO MEET PREPAYMENT OBLIGATION TO CO'S SENIOR LENDERS, DUE ON 15 JULY
●EXPECTS ITS FY24 EBITDA TO BE WITHIN RANGE OF NZ$45 MILLION TO NZ$60 MILLION
●NOW FORECASTING FY24 EBITDA RESULT TO BE AT LOWER END OF RANGE
]●NOTES SIGNIFICANT MAJORITY OF COMPANY'S FARMER SUPPLIER BASE HAVE SUBMITTED CESSATION NOTICES
●DAIRYWORKS SALE PROCESS NO LONGER REMAINS FORMALLY OPEN Further company coverage: ((Reuters.Briefs@thomsonreuters.com;)) undefined

I have highlighted one item in particular.

[winner (n)]

The announcement on ASX

https://announcements.asx.com.au/asxpdf/20240603/pdf/064602vfzl9x3c.pdf

[Basil]

Desperate times.  Still working on a capital raise...who in their right mind would throw good money after bad.

A reminder that the bonds listed on the NZX are subordinated to all other debt and are almost certain to be subordinated to the loan Bright Dairy is making.  A breakup of the company that leaves subordinated debt holders hung out to dry still looks like the most likely outcome to me.

[Hectorplains]

Desperate times.  Still working on a capital raise...who in their right mind would throw good money after bad.

A reminder that the bonds listed on the NZX are subordinated to all other debt and are almost certain to be subordinated to the loan Bright Dairy is making.  A breakup of the company that leaves subordinated debt holders hung out to dry still looks like the most likely outcome to me.

Yes, it's awful but (for now) a better outcome than has been long espoused on this board. Bright are continuing to keep the ship afloat. 

Cessation notices as they say, in what was omitted from the blue font cut and paste, are not necessarily a mark of clear intention.  The logistics of other processors picking up 50+% of Synlait's supply would be interesting. Swapping processors isn't as simple as say swapping your power company.

The guidance is at best beige when it really needs to be triple chocolate.  How can there be yet more inventory issues?   

A glaring omission is any mention of A2. 

[winner (n)]

Those bonds now $65 for a $100

Taking duration and lower price that's a 93% return

[Basil]

I still believe the bonds are only worth a fraction of that.

[Minimoke]

So. No money coming in from Dairy works. No mention of sale of north island assets. No farmers after 2026. Risk of major customer (A2) departing by 2026.

And the Bright Dairy loan needs shareholder approval at vote that excludes Bright. A2 hold around 33% of this vote. How will Penno vote?

And it only gets them through to July. Zero mention of paying bonds back and no chance of Synlait generating cash to pay it back.

Nothing here to change my view that Synlait is totally uninvest able.

[Minimoke]

Ruth Richardson "retires" replaced by another Bright director.