Will the Synlait Milk Ltd (ASX: SM1) share price fall after delivering a mixed FY20 result? It seems so, in early trading the Synlait share price is down 5%.
Synlait is a dairy processing business that manufactures ingredient and nutritional milk powders. One of the main companies that it works for is A2 Milk Company Ltd (ASX: A2M).
Synlait FY20 report
Synlait reported that its total revenue increased by 27% to $1.3 billion. Consumer-packed infant formula sales rose 15% to 49,180MT and lactoferrin sales increased by 46% to 30MT.
However, EBITDA (click here to learn what EBITDA means) only rose by 13% to $171.4 million. Net profit after tax (NPAT) actually fell 9% to $75.2 million.
The company said that profit reduced because of investments in new facilities and acquisitions over the past two years to create new opportunities for growth.
In FY20 the company saw $573 million of growth projects completed including Synlait Pokeno, the advanced dairy liquid packaging facility, and the acquisitions of Dairyworks and Talbot Forest Cheese.
The benefits of the facilities mean: significant conversion cost improvements, a 20% reduction in changeover powder despite processing more complex powders, dryer processing milk more than 14% faster (while lifting quality and yield), a third blending and canning line avoided due to the efficiency savings and an 18% reduction in downtime across all facilities.
Management comments
Synlait CEO Leon Clement said: “Synlait is focused on building a sustainable, diverse and recurring earnings base that comes from multiple customers, sites, markets and categories.
“We are achieving this while balancing the needs of people, planet and profit in our decisions, and regarding to changing customer demand against the backdrop of COVID-19. Our strategy to create a strong, diverse company, is more relevant than ever given the uncertain world ahead. Our team delivered a strong result in an exceptional year.”
FY21 outlook
Synlait is expecting similar demand overall in FY21 compared to FY20, however it’s expecting lower demand in the first half of FY21 because of higher levels of stock in the supply chain – this is exactly what A2 Milk said in its update today.
However, the company is still expecting strong underlying EBITDA and operating cashflows to continue with growth delivered by a full year of Dairyworks earnings and the integration of Talbot Forest Cheese.
Synlait is currently in the process of finalising a long term supply agreement with a new, multinational customer for packaged products which is expected to have a positive impact on earnings from FY23.
Overall, in FY21 the dairy company is targeting a similar profit, or slight improvement, compared to FY20.
Synlait also said it has increased its 2020/21 season base milk price forecast to $6.40 per kgMS, up from the previous forecast of $6.
It seems like Synlait is making good business progress and it would be wise to get another large customer. It does seems quite reliant on A2 Milk at the moment, which is planning to be more involved in production. There are other ASX growth shares I would rather buy first like Pushpay Holdings Ltd (ASX: PPH), but Synlait may do well over the long term, but it’s not the type of business I’d buy for my own portfolio.
