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Synlait (ASX:SM1) HY Report, Is It The Next a2 Milk (ASX:A2M)?

Today Synlait Milk Ltd (ASX:SM1) released its HY report to the ASX for the period ending 31 Jan 2019, could it be the next The a2 Milk Company Ltd (ASX:A2M)?

Today Synlait Milk Ltd (ASX: SM1) released their half-year results to the market for the period ending 31 January 2019, could it be the next The a2 Milk Company Ltd (ASX: A2M)?

Synlait Milk is a New Zealand based dairy processing company which produces a range of milk and milk powder related products such as infant formula.

Key Results

As can be seen below Synlait Milk has been unable to produce the same sort of growth that A2 Milk has, reporting:

Synlait Milk reported processing 12.4% more milk in the period due to manufacturing efficiencies which led to a 26% increase in powders and cream sales. However, sales shifted towards lower margin powers and creams, along with reduced margins on canned infant formulas.

Commentary

Synlait Milk said its results “remain a solid result for the first half of the year”.

The company attributed its lower profit margins on infant formula due to the “result of a new pricing agreement entered into with The a2 Milk Company last July, as well as not having the benefit of higher margin sales to our China based customers that we enjoyed in HY18. These brands are awaiting State Administration for Market Regulation registration”.

Rask Perspective

While there is obviously demand in China for quality infant formula products, there seems to be a customer reliance with its exclusive supply rights for the a2 Milk Company for canned infant formula.

As a result, a2 Milk Company are currently squeezing Synlait Milk’s margins. The company is optimistic of improved margins going forward.

However, the situation looks a bit more complicated than what meets the eye with two of its biggest investors in a2 Milk Company holding 17.4% and Chinese-based Bright Dairy & Food owning 39%. That is enough to make me uncomfortable with the possibility of an opportunistic takeover being stitched up. So I’ll go and look elsewhere…

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