Synlait shares take a hammering

Last week, the share price had tumbled to 46c/share, pushing the value of the company on the New Zealand Stock Exchange to only $100 million. By comparison, two years ago the share price was around $3.23/share and in August 2018 it had reached an all-time high of $13/share. In the past 12 months, the company's share price has lost 68% of its value.

Senior analyst equities at Forsyth Barr, Matt Montgomerie says the falling share price reflects investor nervousness.

"There's investor nervousness around Synlait Milk's ability to achieve its desired asset sales," Montgomerie told Dairy News.

"We believe selling the North Island assets at or near book value will be unlikely, and thus concerns around its ability to repay the $130m of bank debt in July and $180m retail bonds in December."

Montgomerie believes Synlait needs to urgently come up with a deal to offload its new processing plant at Pokeno and a blending and canning facility in Auckland to calm investor nerves and arrest the decline in the share price.

"Investor nervousness is rightly warranted, with asset sales required to repair the balance sheet," he says.

The deflated share price could also make Synlait the target of a takeover. However, Montgomerie believes a takeover of Synlait Milk, as a group, is unlikely.

"The obvious buyer is The a2 Milk Company (a2MC) but we don't see this as viable given its lack of desire for Dairyworks or the North Island assets.

"That said, we do think a2MC acquiring its prized Dunsandel asset is still on the cards but not that Synlait would prefer to sell its other assets before this scenario."

Last month, Synlait reported its six-month results: net loss after tax was $96.2 million with adjusted net loss after tax of $17.4m. Net debt rose 8% to $559m. Gross profit was down 47% to $43.6 million.

The company said it was carrying out "a strategic review" of its North Island assets. It was also thrown a lifeline by its banking syndicate, which has extended the $130 million prepayment due March 28 to no later than July 15, 2024 and approved an additional $30m short-term funding until June 27.

Synlait's largest shareholder, Bright Dairy of China, has provided a letter of support that includes a commitment to participate in a future equity raise and to extend a loan at the request of Synlait.

The financial upheaval also led to another round of board and management changes at Synlait last month.

Co-founder John Penno stepped down from the board, ending a 25-year leadership role within the listed company. Penno co-founded Synlait and was managing director and CEO for 12 years. In 2018, he became a board appointed director, during which time he was temporarily appointed acting CEO and then chair.

Synlait has also appointed a new chairman, George Adams, who joined the board in March this year. Acting chair Paul McGilvary will resume his role as an independent director.

Penno says he supports Adams' appointment as chair and "remain committed to Synlait's future as a co-founder and shareholder".

"Synlait has come a long way since we co-founded the company, buying a farm in Te Pirita near Dunsandel almost 25 years ago. We now take world-class nutrition products to the world and have played a disruptive role in the growth of the New Zealand dairy industry. I am proud of what we have achieved. However, now is the right time for me to leave my leadership role with Synlait."

The company recently reshuffled its management team. Chief finance officer (CFO) Rob Stowell took over the newly created position of chief commercial officer, assuming responsibility for several "critical strategic workstreams" including the sale of its cheese making subsidiary Dairyworks, the North Island strategi assets review, a potential equity raise, and the banking syndicate relationship.

Charles Fergusson has been appointed acting CFO while retaining current responsibilities for on-farm excellence, business sustainability, and corporate affairs.

Montgomerie says it's hard to speculate around Penno's departure but it signifies the current precariou situation Synlait Milk is in.

"This adds fuel to the growing fire," he says.