Synlait to invest $305m to support growth, identify second site

South Island milk processor Synlait Milk has said it will spend a further $305 million on a capital expansion programme over the next three years including investing in a second site which should be identified by the end of the 2017 financial year.

At the annual meeting in Christchurch today, chairman Graeme Milne said when the company listed on the NZX three years ago it started a $250 million capital expansion programme to support its value-add growth strategy. The record $34.4 million in profit in the 2016 financial year showed the "full benefit of that approach and delivered our strongest performance to date", he said, with total shareholder returns of 55 percent since the IPO.

The dairy processor has maintained its guidance given in September that it expects only modest earnings growth in the 2017 financial year over the previous year.

It updated its forecast farmgate milk price for the 2017 season for its 200 Canterbury milk suppliers by $1 to $6 per kilogram of milk solids following the recent rise in global dairy prices. That puts it in line with Fonterra's forecast updated earlier this month and above DairyNZ's $5.05/kg MS break-even line.

DairyNZ has said the break-even price is under review and is likely to be revised upwards to reflect additional farm working expenditure and tax payments. DairyNZ economist Matthew Newman said 2016/17 will be the first season the average farmer will be in surplus since 2013/14.

"We expect a small increase in farm working expenses over the next few months, as farmers spend on items they have been putting off and cope with a wet spring (especially in Waikato and Taranaki)," he said.

Synlait raised $97.6 million in a pro-rata entitlement offer which closed last month to support the capital expenditure programme and repay debt, and that facilitated it listing on the ASX this week.

Most of its corporate shareholders participated in the rights issue and its top four shareholders now account for around 60 percent of its shares: Bright Dairy has 39.1 percent, Mitsui & Co 8.4 percent, FrieslandCampina 8.2 percent, and Munchkin 3.9 percent. Institutional ownership also increased post the rights issue with 8.8 million shares bought by funds and investment houses, and Australians account for 72 percent of this category. Market capitalisation is now $600 million.

Managing director and chief executive John Penno said this year's record profit followed an almost fourfold increase in canned infant formula from 4,300 metric tonnes (MT) to 16,000 MT.

Proposed Chinese regulations for infant formula manufacturers are expected to moderate canned infant formula growth, impacting earnings. Penno said the regulatory changes were continuing to evolve as Chinese authorities released new information.

From Jan. 1 next year manufacturers will have to apply to register up to three brands with nine recipes for an initial five-year period. Each recipe has to be made on registered premises with manufacturers able to register up to three brands per facility provided the differences can be scientifically proven. Synlait is working with its lead customers to submit the necessary applications to the Chinese authorities early next year.

Penno said continued investment in customer and market development will support volume growth to reduce reliance on the China market. It's focusing on developing value added cream, adult nutrition opportunities, and making more from milk beyond infant formula.

Investments totalling $174 million announced at the IPO ended up $47.1 million above budget but Penno said had the scope not been increased, key plant would already be hitting or exceeding capacity. All investments, apart from the lactoferrin recovery facility. were meeting or exceeding original expectations, he said.

The new capital expenditure plan includes $34 million for a second wet mix kitchen next year to double infant formula capacity, $30 million in FY18 on manufacturing capability to support a new value add cream strategy, and $10 million on other differentiated milk stream processing. A further $44 million will be spent in FY18 and FY19 on consumer packaging facilities, including doubling the current canning capacity, $130 million on a fourth spray dryer in 2019, and a further $57 million on new infrastructure including a drystore and initial second site investment.

Shareholders also approved an increase in director fees today with the fee for directors rising to $70,000 from $60,000, for each of the committee chairs to $82,000 from $66,000 and for the chairman to $130,000 from $108,000. The increases will apply from April 1 next year.

Shares in Synlait fell 2.1 percent or 7 cents to $3.25. They've risen 8.4 percent since the start of the year.

(BusinessDesk)