Synlait Milk, the best performing stock on the benchmark NZX index this year, almost doubled annual profit and lifted its margins while outlining plans for further expansion into value-added dairy products.

Profit surged 89 percent to $74.6 million in the year ended July 31, while revenue rose 16 percent to $879 million, the milk processor said. Gross profit per metric tonne lifted to $1,294 from $792 as it increased its volume of consumer packaged infant formula to 28 percent of sales from 13 percent.

Over the decade since it was formed, Synlait has been foregoing dividend payments in favour of investing in new plants, which has allowed it to increase production of a diverse range of higher value dairy products.

In the latest year it has been working on new and expanded plants in Dunsandel, Auckland and Pokeno as well as a research and development centre in Palmerston North. 

Today it announced that it has inked an agreement to buy the Talbot Forest Cheese Temuka plant for between $30 million and $40 million as part of its expansion into everyday dairy products, an estimated $2 billion market in New Zealand.

“This has been a milestone year for Synlait as we grew both in capability and capacity,” said chair Graeme Milne. “We’re stepping up in terms of our performance and we’re looking ahead at where we want to be.”

The Temuka specialised cheese manufacturing facility, commissioned in September 2017, can produce 12,000 metric tonnes a year and will allow Synlait to manufacture a variety of products to meet demand in local and international markets, the company said. As part of the purchase, Synlait will provide an $18 million loan facility to allow Talbot to complete capital works ahead of settlement in August next year.

Synlait’s expansion has seen total net debt increase by $32.3 million to $114.9 million as it channeled $103.8 million into growth projects financed through a combination of operating cash flow and debt. Despite the extra spending, the company has maintained a ratio of net debt to earnings before interest, tax, depreciation and amortisation of 0.8x, from 0.9x the year earlier, which it said leaves the balance sheet “well equipped to fund further growth”.

Chief executive Leon Clement, who took over from founder John Penno last month, indicated profitability may not grow at the same rate in the coming year, as the company forecast infant formula sales would lift to between 41,000 and 45,000 metric tonnes, compared with 35,580 metric tonnes in 2018 and 18,776 metric tonnes in 2017.

The company expects to manufacture increased volumes for Kiwi company a2 Milk, Chinese companies New Hope and Bright Dairy, and US company Munchkin’s Grass Fed brand in Australia and New Zealand.

It expects to secure product registration in China this financial year for New Hope’s Akara and Bright Dairy’s Pure Canterbury brands as part of stricter rules being implemented in that country, and noted the tighter regulations would be beneficial for Synlait.

The company said it was taking longer than expected to register its Munchkin Grass Fed infant formula in the US and it is looking to take more control over the process. The forecast volume increase for this coming year didn’t include significant volumes of that product in the US, it said.

Its shares have soared 78 percent so far this year. The stock gained 0.3 percent to $12.82 as of midday today.

The milk processor said it expects to pay its farmer suppliers $6.75 per kilogram of milk solids for the 2018/19 season, down from its opening price forecast for $7/kgMS. It said it lowered its expectation due to declining commodity prices, mitigated to some extent by a weakening New Zealand dollar. However, the company said its forecast anticipates an improvement in commodity prices in the medium term due to significant pressures on milk supply in Europe, Australia and the US, and signals from China that supply is also constrained in that market.

Synlait confirmed its average milk price for the 2017/18 season was $6.78/kg, which consists of a $6.65/kgMS average base price and a seasonal and average value-added incentive payment of 13 cents/kgMS. More than half its farmer suppliers receive a premium payment, it said.

Tina Morrison was a Dominion newspaper scholar and worked for Bloomberg News before joining BusinessDesk in 2013.

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