Synlait posts 3.8% gain in 1H profit, expects 'modest' full-year earnings growth

Synlait Milk, the NZX-listed dairy company, posted a 3.8 percent lift in first-half profit as higher sales offset increased investment in people and business development.

Profit increased to $10.6 million, or 6.34 cents per share, in the six months ended Jan. 31, from $10.2 million, or 6.99 cents, a year earlier, the Rakaia-based company said in a statement. Sales jumped 35 percent to $288.7 million. The year-earlier earnings included a $2.9 million unrealised foreign exchange loss.

Synlait said its lift in sales had also delivered a $2 million increase in gross margin as it sold higher volumes of canned infant formula. The company used some of its operational cash flow and $97.6 million of new equity raised from a rights issue in October to halve its net debt over the past 12 months to $147 million, and it expects to halve debt again by the end of the financial year, giving it more scope to consider acquisitions amid industry consolidation. Its overhead costs rose by $4.7 million.

"Strong sales growth has driven an improvement in our earnings," said Synlait chair Graeme Milne. "As we have prepared for our next phase of growth, we have built our team and balance sheet strength."

The company said it continues to expect growth in gross margin, driven by increased sales of ingredients and infant formula, which will be largely offset by increased costs as it prepares for its next growth phase.

It reiterated that it expects "modest" growth in full-year profit, followed by a higher rate of profit growth in its 2018 year and beyond.

Synlait listed in 2013 and hasn't yet paid a dividend. Its shares last traded at $3.50 and have gained 15 percent over the past year.

The company said changes in Chinese infant formula regulations require that each manufacturing site will be able to register a maximum of three brands, which means its pending investment in a new infant formula blending and consumer packaging facility will be on a standalone site.

"While this is likely to be more expensive than building on our existing site, this cost will be greatly outweighed by the risk mitigation a second manufacturing site will bring and the value of being able to work with a larger portfolio of customers," it said.

The company said regulatory change and overstocking of some brands had meant the past six months was a period of "considerable uncertainty" for the infant formula industry, and sale volumes in the first half of this financial year were lower than the second half of its 2016 year.

"However as stocks have cleared and greater regulatory clarity has emerged for our customers, we have seen order volume growth resume," the company said, adding it was confident that it would end the year close to its target volumes of 18,000 metric tonnes of finished infant formula.

Synlait said the period of regulatory uncertainty in China had prompted it to explore a range of opportunities with existing and potential customers.

It said its first shipments of "grass fed" infant formula product for its US partner Munchkin Inc is underway and will be ready to launch once the regulatory registration process with the US Food and Drug Administration has been completed. Significant manufactured volumes for the US market, the second-largest infant formula market after China, aren't expected until the 2018 financial year, it said.

(BusinessDesk)