Synlait shareholder Bright Dairy 'digging its heels in' on Dunsandel plant
BusinessDesk
Synlait’s major shareholder Bright Dairy is digging its heels in and sees a pathway out of the company’s financial troubles holding onto the Dunsandel plant, an analyst says.
On Monday, the debt-laden dairy processor said its 39% Chinese shareholder, Bright Dairy, would loan it $130 million for a looming debt repayment, subject to approvals, including from its shareholders.
The company told markets most of its farmer suppliers had issued two-year notices to leave, and it reiterated it had Bright Dairy’s backing for a capital raise. Synlait had $514m in debt falling due in the next seven months.
Forsyth Barr analyst Matt Montgomerie said the loan was a good short-term solution that showed Bright's support, but there was still significant risk around the Dunsandel plant.
Montgomerie said Synlait could end up stranded with Dunsandel as customer a2 Milk could move its production away from the facility in the next five to 10 years.
The Dunsandel factory was seen as the jewel in the crown for Synlait. The plant holds an important license to manufacture Chinese-label infant formula for Synlait shareholder a2 Milk.
A2 and all that
However, the relationship between the two dairy firms was rocky, with a2 moving to cancel Synlait’s exclusivity rights to manufacture Chinese infant formula and the companies were now in arbitration.
A2 had also invested in Mataura Valley Milk and said it wanted its own Chinese registrations so it could innovate and develop new products. The company was shifting production of its a2 Platinum brand stage 4 formula to NZ New Milk, a subsidiary of giant dairy operator Lactalis, and away from Synlait.
Synlait had given up on selling its Dairyworks cheese business and was working with Bright on a capital raise.
Montgomerie said a capital raise of more than $50m would be unlikely, unless Bright "really wanted to come to the table".
He said Synlait's statement that a "gun to the head" equity raise plus the loan would be sufficient to reduce its debt to a sustainable level "felt stretched" given the capital structure.
Synlait's guidance update, where it said it would come in at the lower range of full-year earnings of $45m to $60m, should not be underplayed, the analyst said.
"The operating environment just continues to worsen."He said he suspected the downgrade was due to Synlait's Abbott volumes through Pokeno.In April, Macquarie analysts estimated Abbott volumes at Pokeno had declined since the beginning of 2024, from about 6,500 metric tonnes to about 4,000 metric tonnes.
Farmers want out
Montgomerie said it also appeared there had been a significant acceleration in the farmer exodus from Synlait.BusinessDesk reported in April that at least 50 suppliers had put in their cessation notices, which take two years to come into effect.
Montgomerie said a significant majority was likely to mean at least two-thirds of Synlait’s farmers had handed in notice to leave.
A2 said in a statement on Tuesday that it would not provide comment on Synlait’s recapitalisation or divestment process. It said it was not concerned about the extent of farmer supplier cessation notices, which would not kick in until 2026.
One supplier said Synlait’s board held meetings with farmers in the North and South islands, which they described as “very constructive and honest”.
While Synlait’s forecast base milk price is on par with Fonterra’s midpoint for the new season of $8/kgMS, Synlait suppliers miss out on the dividends and other incentives distributed by Fonterra.Given that, Montgomerie said Synlait had “next to nothing to stand on” in terms of attracting farmer suppliers.
Fonterra’s consumer brands sale may have helped accelerate the planned exits, he said, as that would see capital returned to farmer suppliers and Fonterra’s share price was relatively cheap.Fonterra previously said it had a “strong pipeline” of suppliers wanting to jump ship.
Fonterra lower barriers
With the co-operative’s new capital structure, it’s now easier for farmers to join. Farmers were required to hold one share for every milk solid they produced.
Under its “flexible shareholding” scheme, new farmers have up to six seasons achieve a minimum holding of 33% of their milk supply.
Added to that, shares in the co-op – which were restricted to suppliers – were trading at about $2.90 a share. In 2013, they were trading at $8.
Montgomerie said it made sense that suppliers would want to exit Synlait.Outside of Fonterra, suppliers had other options including Open Country, OFI – which recently opened its plant in Tokoroa – and Taupō-based Miraka.Down south, farmers could jump to Westland Milk Products or Oceania Dairy, both owned by China’s Yili Group.
Confidence and certainty
OFI told BusinessDesk in April it had received a “positive response” from forward-thinking Waikato dairy farmers who wanted a “business partner that brings them confidence, certainty and cash flow, and hands-on solutions to the everyday challenges they face”.
The company’s current focus was planning the next stage of growth at its Tokoroa plant following a successful first season of milk acquisition, “which exceeded our expectations”.
OFI’s plan was to make specialised, high-value protein-based dairy ingredients alongside whole milk powder.
“This investment and expansion will boost returns for our current farmers, cater to the increasing interest from Waikato farmers who want to work with us and help us meet the growing demand from our global customers for high-quality New Zealand dairy from grass-fed systems,” the company said.
Miraka, which touts itself as a low-carbon processor and is owned by Māori trusts, said on Tuesday it would pay a $8.42/kgMS milk price to its suppliers.Its base is $8.25/kgMS with farmers able to earn the additional premium under Te Ara Miraka, its excellence programme.“We’re committed to doing our part to pay the best milk price, to the best people and farms,” its chief executive Karl Gordon said.
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