Synlait Milk executives are unlikely to have had much of a break over Easter as the embattled dairy processor gets set to release its overdue financial results for the six months to December, along with details of how it will fund a $130 million debt repayment that was due to have been made last week.
Synlait shares were placed in a trading halt on Thursday at the request of the company as it sought more time to work with its bankers and major shareholder to remedy the current financial impasse.
In a market announcement Synlait said it would update investors today on its plans to “deleverage” its balance sheet, including discussions with 39 percent shareholder Bright Dairy “regarding the provision of financial support”.
But today’s announcement may only be a temporary reprieve for Synlait with the company facing a further $180m bond repayment in December.
The value of its shares have fallen dramatically over the past year, following a series of negative market updates – particularly after its major customer a2 Milk cancelled an exclusive supply agreement in September 2023, related to performance and delivery standards for its Chinese-bound infant formula.
And late last year, a2 Milk further ramped up pressure on Synlait by adding an unspecified amount of costs to the ongoing contract dispute.
The companies are currently working through a binding arbitration process after negotiations between the parties failed to arrive at a mutually agreeable outcome.
Diversifying its product range and customer base to reduce its reliance on a2 Milk has been a major focus for the company, along with the attempted sale of its consumer products business DairyWorks, which it purchased in 2019, which so far has elicited little interest from prospective buyers.
If Synlait fails to secure the necessary financial support to improve its balance sheet, analysts say the company could be facing some difficult choices including the potential sale of its Canterbury processing plant or raising new money through what would be a heavily discounted share issue.
It’s been a dramatic fall from grace for a company that was once a shining star in New Zealand’s dairy sector.
First listed in 2013 its shares opened at $2.50, later peaking in September 2018 at $13.50 as the company generated annual sales in excess of $1.5 billion and boasted a market capitalisation in excess of $2b.
Since then it’s been all downhill for shareholders with its latest share price languishing at 75c, earnings declining at an average annual rate of more than 40 percent in recent years, while Synlait’s market capitalisation has plummeted to less than $150m.
Synlait’s protracted decline can be traced back to a2 Milk’s decision to establish its own processing plant following its purchase of the Mataura Valley Milk plant in Southland in 2021, thereby significantly reducing the volumes being processed at Synlait’s Canterbury based Dunsandel plant. Previously a2 Milk, a 20 percent shareholder, had been regarded as the company’s cornerstone consumer/partner.
Additionally, an ill-timed decision, as it turned out, to undertake a debt-based expansion of its processing capacity only exacerbated the company’s financial woes following developments in Auckland (2017), Pokeno in Northern Waikato (2018/19), the acquisition of Talbot’s cheese making plant in Temuka (2019) and Dairyworks (2020) in Christchurch.
At the same time Fonterra, after finally waking up to the value of a2 milk, meant Synlait no longer had the field, or more importantly the market, to itself with the diary giant having the right to supply a2 milk outside of China and Australasia.
And then of course Covid compounded everything. a2 Milk’s exports into China, which relied on the informal daigou channels operated generally by small business owners, were significantly affected to a much greater extent than other exporters as a result of personal travel being severely constrained more than formal routes. This led to reduced demand for its processing capacity and a slower return to normal trading conditions.
The debt-fuelled expansions undertaken by Synlait, which is estimated to to have cost the company upwards of $500m, coinciding with the Covid induced downturn, produced a perfect storm for the company from which it has never recovered. Multiple changes in senior management in recent years have only compounded its problems.
Shareholders will certainly be holding their collective breath when the company reveals the full extent of its financial situation today, and more importantly will be wanting to hear how exactly Synlait plans to remedy its current predicament, though whatever the outcome a return to its former glory days seems unlikely.
First quarter delivers mixed bag for local investors
The well-known investing adage “the trend is your friend, so don’t fight the trend” has served investors very well in recent months, particularly those with exposure to some of America’s high performing tech stocks.
As markets rule a line under the first quarter of 2024, investors who were canny enough to buy in late October last year, just as the US Federal Reserve changed its outlook on interest rate cuts, will be feeling well satisfied with their timing.
And for those brave souls who threw caution to the wind and brought a year earlier when markets began to bottom out in October ’22 the gains have been even more spectacular.
| Sept ‘23 Qtr | Dec ‘23 Qtr | Mar ‘24 Qtr | From Oct ’22 low | |
| NZX50 | -5.2% | +4.2% | +2.8% | +13% |
| ASX200 | -2.1% | +7.7% | +4.1% | +23% |
| S&P500 | -3.6% | +11.2% | +10.2% | +50% |
But as the above table highlights, local investors will be feeling rather shortchanged when comparing the performance of the NZX50 with the S&P500, with two notable exceptions.
Shares in a2 Milk which hit a low of $4.00 in November last year have since rebounded almost 70 percent as the outlook for the dairy exporter continues to improve buoyed by rising international dairy prices, while utilities software developer Gentrack has seen its shares surge more than 85 percent over the same period as the company’s financial performance continues to go from strength to strength. In fact, since hitting a low of $1.35 in August 2022, Gentrack shares have gained a whopping 500 percent!
Despite the challenges being faced in the retail sector, Hallenstein Glassons has been the standout performer with a 24 percent lift in its share price during the quarter. The clothing retailer reported a solid half year result last week with better than expected sales in Australia proving that some retailers are coping better than others in the current environment. By comparison, shares in outdoor clothing retailer KMD Brands (formerly Kathmandu) ended the quarter down 27 percent.
For the top 10 listed stocks on the NZX their performance in the first quarter has also been relatively muted reflecting the challenging economic headwinds being faced by both businesses and consumers.
| F&P Healthcare | +8.1% |
| AKL Airport | -2.4% |
| Spark | -7.7% |
| Infratil | +7.6% |
| Meridian | +8.6% |
| Contact | +8.0% |
| EBOS | -5.4% |
| Mainfreight | -0.1% |
| Mercury | +5.1% |
| Fletcher Building | -14.1% |
While Fletcher Building’s woes have been well publicised, the agriculture services sector has also been feeling some pain during the quarter with shares in rubber goods manufacturer Skellerup and farm services provider PGG Wrightson down 21 percent and 36 percent respectively.
In the US too, some of the market’s former high flyers are also beginning to feel the squeeze from higher interest rates and consumers tightening their belts.
For the quarter Apple shares have fallen more than 10 percent to record their worst quarterly performance since June last year after reporting slumping sales in China, its biggest market, while shares in Tesla slumped almost 30 percent during the quarter after the company indicated it faced the prospect of zero sales growth this year.
However, the undoubted star performer during the quarter continues to be AI chip maker Nvidia with a gain of 82 percent since the start of the year bringing its total gains since October 2022 to a staggering 800 percent.
On crypto markets it’s been a similar story with Bitcoin recording a gain of 65 percent, its best quarterly performance since the first quarter of 2021 as investors pile into recently launched exchange traded funds (ETFs) which have given crypto markets a massive boost following the inflow of new funding.
All of which has led to plenty of speculation in recent months that stocks in the US could be in the early stages of bubble territory.
While the debate, as always, attracts plenty of diverging views between those who argue AI is truly the start of a new technology paradigm and those who point to a rampant US fiscal deficit that has the potential for a dramatic market shock similar to what occurred in the UK in 2022, investors should be reminded of that other well known investing adage “no one rings a bell at the top of the market”.
While the local market certainly wouldn’t be considered in bubble territory, investors well know what happens when US markets go into reverse gear. One thing everyone can agree on… that point is now closer than it was at the start of the first quarter.
ANZ data reveals falling business and confidence
A fall in GDP for the December quarter “seems to have given things a decent shunt south” in respect to business confidence, according to ANZ economists.
In their latest (March) Business Outlook Survey recorded business confidence levels fell 12 points to +23, while the expected own activity measure fell 7 points to +23 and past activity eased 2 points to -7.
“The survey showed weakening activity indicators and a slight fall in inflation pressures,” ANZ chief economist Sharon Zollner said, while noting a strong “recession headline” impact was evident in the accompanying consumer confidence data.
The latest ANZ-Roy Morgan consumer confidence survey recorded a fall of 9 points in March to 86.4, with declines across most questions contained in the survey which Zollner said were likely to have been affected by recession headlines.
“Late-month responses were markedly weaker than those that preceded the GDP data,” she also pointed out.
Cannasouth calls it quits after failing to secure additional funding
Listed medicinal cannabis company Cannasouth has been placed in voluntary administration after failing to raise additional funding to continue its operations.
The news deals a severe blow to a sector that was once seen as promising new export opportunity being closely aligned to New Zealand’s reputation for producing high quality agricultural products.
Cannasouth shares had earlier been placed in a trading halt following a dispute with some investors as directors desperately sought additional funding in order to remain solvent.
In a market announcement shortly before the close of trading on Thursday, Cannasouth revealed administrators had been appointed.
The company said the decision came after “careful consideration of the circumstances, including the challenges of securing additional funding and balancing the interest of shareholders and convertible note holders”.
Ben Francis and Garry Whimp of Blacklock Rose had been appointed joint administrators, and now had responsibility for planning for ongoing operations and “meeting cashflow positive results”.
“The administrators will be undertaking a detailed review of Cannasouth’s operations with a particular focus on identifying the profitable lines of the company’s products and services,” Cannasouth said.
Its most recent financial statements revealed a full-year loss of $8.8m for the year ended December, though revenue had grown by 11 percent to $956,000.
Cannasouth shares last traded at a new all-time low of 0.095c prior to Thursday’s trading halt.
First listed in June 2019 following the prospect of a promising outlook for the burgeoning medicinal cannabis sector, Cannasouth shares initially soared peaking 10 months later at $1.42. But as losses continued to mount and initial growth expectations failed to materialise, the company’s share price quickly went into reverse gear and never recovered.
Shares in fellow listed medicinal cannabis producers Rua Bioscience and Greenfern Industries also remain under pressure trading at 0.078c and 0.045c respectively.
Coming up this week…
Tuesday
- Synlait Milk – half year results
Wednesday
- ANZ Commodity Price Index
- Property for Industry AGM
- Employments Indicators (Feb) – Stats NZ
- Labour Force Survey (March Qtr) – Stats NZ
Thursday
- Building Consents (Feb) – Stats NZ
Friday
- Tatauranga umanga Māori – Stats on Māori businesses (Dec Qtr) – Stats NZ
