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Synlait’s Financial Challenges and Road to Recovery
Another struggling Kiwi listed company is Synlait (ASX:SM1); Its market position deteriorated with weaker sales, high costs and a major disagreement with its main customer, A2 Milk.
Synlait shares have fallen 40% this year and more than 70% in the last 12 months due to a conjunction of events that have placed it under increasing financial pressures. It has sought financing and asset sales and has had mixed results, as Monday’s statement to exchanges on both sides of the Tasman confirmed.
It failed to raise money in a share issue, failed to sell a key asset and also warned that it would breach three of its four banking covenants at the end of the July 30 financial year. And to top it off, the already downgraded annual results look even worse .
And to make matters worse, the company’s financial decline and difficulties caused it to lose the trust of many of its milk suppliers, who notified the closure of their businesses as of 206.
Its main shareholder, Bright Dairy of China, will lend Synlait US$130 million. Bright Dairy holds 39% and the loan should be seen as a rescue of Synlait and a measure by the Chinese group to protect its existing investment (which is in a loss-making position).
The loan will more than double Synlait’s $96 million ($104 million) value — the best sign yet of how difficult the dairy company’s future remains.
The loan will need shareholder approval; It’s a related party transaction (Bright won’t be able to vote), and for the company, it can’t happen soon enough – it says it will use the entire loan “to meet its prepayment obligation to the company’s senior creditors, due 15 July 2024.
“Loan drawdown is conditional on Bright Dairy securing all necessary corporate, shareholder and external approvals, as well as meeting customary drawdown conditions and the consent of Synlait’s banking syndicate (including subordination terms).”
The loan is an acknowledgment by Synlait and Bright Dairy that the New Zealand company was unable to raise funds through a share issue because the shares were too weak and investors were reluctant to invest.
Synlait President George Adams said in the statement: “We are grateful for Bright Dairy’s support. We are actively working with Bright Dairy on the remaining work related to this shareholder loan and a future capital raise. The shareholder loan and future capital increase will allow Synlait to reduce its debt to a sustainable level.”
At the same time, Synlait was forced to cancel the sale of Dairyworks because it was also unwanted.
“Dairyworks is a high-value business and the Board is committed to ensuring the best possible return for shareholders,” the company said on Monday.
“Although the Council has received interest in the business from a number of parties, a binding offer has not materialized at a level that would be acceptable. Although the company considers offers credible, the sales process no longer remains formally open.
“Dairyworks continues to make a significant contribution to Synlait’s overall financial performance,” said Synlaid.
Synlait also warned that it “is now forecasting that it is unlikely to meet three of its current banking covenants on July 31, 2024, the Interest Coverage Ratio, the Leverage Ratio and the Senior Leverage Ratio. This reflects the timing of deleveraging and the further weakening of Synlait’s financial performance.
“The banking union is currently reviewing a package of proposed exemptions presented by the company. The union has continued to support Synlait and is actively engaging with the company on the requested exemptions.”
The company also warned investors that its reduced EBITDA for the year to July 31 will be on the lower side of the lower figure.
“Synlait still expects its EBITDA for FY24 to be in the range of $45 million to $60 million, excluding a non-cash adjustment for the change in product costing method of approximately $17 million. Synlait is now forecasting the FY24 EBITDA result to be at the lower end of this range.”
And the company faces a possible exodus of dairy farm suppliers – starting in 2026.
“The dairy season ended on May 31, 2024, and Synlait recognizes that it has been an especially difficult season for its agricultural suppliers, given rising on-farm input costs. Synlait also notes that a significant majority of the agricultural supplier base of the company has filed cessation notices, which is expected given its current performance.
“Retaining milk supply continues to be a critical priority. Agricultural suppliers have signaled that they want to see Synlait’s balance sheet deleveraged so that advanced rates can be increased further, and filing a cessation notice provides one option, in rather than a clear intention to sign with other processors.
“Synlait is committed to working with its agricultural suppliers to improve its offering. The company provided competitive milk price updates for the 2023/2024 and 2024/2025 seasons, and a competitive advance rate for the 2024/2025 season last week .
“Synlait’s current financial performance is not affected as the cessation period is two years. This is because interruptions received in the immediately preceding year up to the cut-off date of May 31, 2024 would affect milk supply from the year fiscal 26 if they are not withdrawn.”
Synlait CEO Grant Watson said in the release: “We strongly believe that Synlait presents an excellent value proposition for farmers, with our best-in-class Lead with PrideTM program and attractive premium milk premiums standout features.”