Bell Potter research

Synlait Milk Ltd (SM1.AX)
Accelerating growth in the North Island

Nutritionals demand accelerates asset development: SM1 has released further details around its North Island strategy at Pokeno, with an expansion in spray drying plant capacity (from 40kt to 45kt) and a timeline that is expected to see the commencement of operations during FY20e. The projected cost of the plant is ~NZ$250m, excluding the cost of site, with milk collections from suppliers anticipated in Jun’19. Our previous projections had assumed a 40kt plant operational by FY21e at a capital cost of ~NZ$260m. The acceleration of the development and move to develop a new A2 milk pool is a positive development in our view and suggests optimism around demand for finished IMF and base powder products.

Changes to earnings: Following the announcement we have revised our forecasts to reflect an acceleration in the Pokeno development as well as incorporating recent farmgate milk price announcements and commodity price movements. Our forecasts for Pokeno assume that in year one the majority of products is base commodities with a transition over time to higher grade nutritional products. The net effect is upgrades to NPAT of +1% in FY18e, +1% in FY19e and +4% in FY20e. Our target price lifts to A$11.70ps (A$10.80ps) reflecting these changes and an upward revision in our value for Pokeno.

Investment view: Retain Buy rating: The key driver of earnings and value at SM1 has been the transition from a producer of bulk dairy ingredients to a producer of higher value consumer packaged and IMF products. To date this process has been driven by A2M branded products but increasingly we expect SM1 to benefit from supply agreements with New Hope Nutritionals, Bright Dairy, Munchkin and Foodstuffs. We retain our Buy rating with potential share price catalysts for SM1 including: (1) receival of CFDA registration for New Hope and Bright IMF products; (2) USFDA approval for the Munchkin grassfed product; (3) completion of the liquid beverage plant and clarification on the RTD nutritional strategy; and (4) completion of the Pokeno facility and transition from base ingredients to nutritional’s products supporting an improving ROIC profile in FY21-22e.