Synlait's half-year result paints a gloomy picture

For the six months ending January 31, the listed company recorded an after-tax loss of $96.2m and a working capital deficit of $204.9m.

Add loans and borrowings due for repayment and/or refinancing in the next twelve months of $514m – secured syndicated senior debt of $334m and unsecured subordinated retail bonds of $180m, the company faces an uphill battle to turn around its fortunes this year.

Chief executive Grant Watson told a briefing last week that the company had too much unutilised capacity and too much debt. He says the company needs to reduce capacity and use money from divestments to reduce debt.

Watson added that Synlait is banking on deleveraging, a business recovery plan and strengthened leadership to ride out the storm. Potentially on the chopping block is the five-year old stateof- the art Pokeno plant, south of Auckland, which is operating below capacity. Meanwhile, a blending and canning plant in Auckland is also possibly up for sale.

In the first half of the 2024 financial year, the company wrote down $50m because of underutilisation of North Island assets. The assets are valued around $400 million. A strategic review of these assets is underway and a decision of whether to sell all of part of the assets will be made later this year.

There’s also Dairyworks, a cheese making business that Synlait bought in 2020 for $112m. The company has poured money into Dairyworks, which is now valued around $120m following a $30m write down this year. Dairyworks has been on the market since last year.

Watson says Synlait will ensure that any assets sales will provide maximum return for shareholders.

Synlait is also toying with the idea of a capital raise. While Bright Dairy, which owns 39% of Synlait, is on board for a capital raise, second largest shareholder a2 Milk Company hasn’t been consulted. Watson says if they decide to embark on a capital raise, a2MC, which holds 19% stake in Synlait, will be consulted.

The company’s banking syndicate has agreed to extend a $130 million prepayment from March 28 to July 15 this year and provided an additional $30 million of short-term funding for the next three months.

Watson notes that significant loan repayments will fall due during the next 12 months and successful execution of deleveraging options will be required to meet repayment obligations.

“Without successful deleveraging, Synlait may not be able to meet financial obligations as they fall due,” he says. “There will be material uncertainties associated with the timing and outcome of these deleveraging options.”

Synlait’s balance sheet reset initiatives are underpinned by a letter of support from its 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,” Watson adds.

“As well as establishing a clear deleveraging plan for our balance sheet, we have highlighted several forward-looking initiatives as part of our well-progressed business recovery plan to accelerate volume growth and further optimise our manufacturing, quality, and cost performance.”

Watson says Synlait was founded as an entrepreneurial, innovative, disruptive, and sustainable company.

However it has long faced significant strategic risk around a lack of customer and product diversification and in response the company has invested in capacity expansion and category diversification.

“More recently we made the decision to refocus our strategy on areas where we have a clear competitive advantage to deliver diversified, high-value growth. It is important we do not lose our competitive advantage.”