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Synlait's Financial Turbulence

New Zealand 25.10.2023
Source: The DairyNews
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Forsyth Barr senior analyst Matt Montgomerie has expressed his view that Simon Robertson's resignation from his role as independent chair of Synlait is perplexing given the timing. This abrupt departure of Robertson, who had only been in the position for less than a year, has raised questions about potential internal discord within the company regarding how to address its challenging debt situation.
Synlait's Financial Turbulence
Matthew Goodson, the managing director of Salt Fund Management, pointed out that Simon Robertson's background as a former CFO of Auckland International Airport equipped him with valuable financial expertise to address the issues confronting Synlait, a firm listed on the New Zealand stock exchange. Synlait is facing a substantial debt payment of $130 million due in March, and it has also committed to selling Dairyworks and Talbot Forest Cheese. Additionally, it is currently embroiled in arbitration with its significant customer, a2 Milk, which seeks to terminate an exclusivity contract with Synlait to produce its Chinese-label infant formula at Synlait's Dunsandel plant. A2 Milk alleges that Synlait has not upheld the contract's terms, while Synlait contends that A2 Milk cannot cancel the contract.

The confluence of these financial challenges, the dispute with a major customer, and the high turnover of key personnel indicates that Synlait is under significant pressure, according to analysts. However, Matthew Goodson suggests that Simon Robertson's sudden departure may indicate "some difficulty or disagreement between the parties as to what they should do next."

Notably, there have been changes at the top management level within the company. Simon Robertson took on the role of chair in December, following Synlait co-founder John Penno's appointment as chairman in January of the same year. This period also saw the appointment of Grant Watson as Synlait's new CEO, and an executive restructure was announced in July. The new interim chair, Paul McGilvary, joined Synlait's board in January 2022.

Matthew Goodson also highlighted that Synlait's net debt exceeded $400 million, and selling the Dairyworks business, which was acquired for $113 million in 2020, might not yield a premium price and would not necessarily resolve the company's financial challenges. In the past year, Synlait's net debt increased by 21% to $413.5 million.

To address these financial difficulties, Synlait could consider raising additional capital, but this might entail offering shares at a discount. Bright Dairy, a major shareholder owning 39.01% of Synlait, could potentially assist, but its own debt situation is unclear. A2 Milk increasing its investment in Synlait is unlikely, as it follows a business model that does not require ownership of low-returning physical assets, unlike Synlait.

Forsyth Barr senior analyst Matt Montgomerie believes that Simon Robertson's resignation raises questions about internal challenges and has implications for the company's financial stability. The sale of Dairyworks, though essential, appears to be a challenging process, and negotiations about its value are likely tense.

Montgomerie also suggests that Synlait's banks might allow an extension of the March debt repayment deadline. The ongoing dispute with a2 Milk hints at deeper issues not publicly disclosed. Forsyth Barr's analysis shows declining manufacturing volumes for Synlait from its factories, with the Pokeno plant already underutilized, and losing the a2 Milk contract would exacerbate this decline. This situation demonstrates how quickly circumstances can change in the business world.

Brad Gordon, a board member at Hobson Wealth Partners, points out that Synlait serves as a reminder for retail investors to closely monitor a company's balance sheet. The company's substantial net debt is a concerning factor, and its market capitalization of around $290 million leaves little room for maneuver. Any capital-raising efforts would require the support of its two major shareholders, Bright Dairy Group and a2 Milk. While this presents challenges, the presence of these key shareholders is seen as a positive aspect. Synlait's constitution mandates the inclusion of three independent directors, and until a new independent director is appointed, one Bright Dairy director must abstain from voting.

In response to these developments, Synlait's shares fell by 2.21% after the opening of the NZX. The company declined to provide further comments on the situation.

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