a2 Milk could buy Synlait Milk’s Dunsandel, which would reduce supply chain risks, capture manufacturing margin and drive earnings per share growth, says Forsyth Barr.
a2 Milk has clearly indicated plans to vertically integrate its supply chain, either through merger and acquisition, investment at Mataura Valley Milk or through joint ventures and alliances. Compelling option
“A compelling option is to acquire SML's Dunsandel asset. We are not suggesting this is likely, but it does offer attractive qualities to a2 Milk, particularly the all-important regulatory licenses,” Forsyth Barr analysts Matt Montgomerie and Benjamin Crozier said.
There has been some speculation that Synlait might be looking to sell the plant as it looks to recover from what it called an “extremely challenging year” and drive down debt.The key attraction is the plant’s General Administration of Customs of China (GACC) and State Administration for Market Regulation (SAMR) licenses.
“We think the asset value is likely $500 million to $700m,” they said.While they don’t have a firm view of what it would cost, they would expect a purchase price of more than $400m.
Jewel
“Dunsandel is the jewel in SML's asset crown. It is a high-quality, high-specification infant formula [IF] processing facility that remains well-utilised. A significant value driver as to how SML could realise large sales proceeds is its regulatory approvals. "This is difficult to tangibly value, but is the core reason why ATM may pay a large price,” they said.
Montgomerie and Crozier said it would likely be value accretive for a2 Milk shareholders but note Dunsandel isn’t the only option.The key strategic rationale in a2 Milk looking to acquire another asset is access to further China label registrations.
There are other MPI-approved NZ infant formula manufacturers with current SAMR approvals; the options are NZ New Milk, owned by Lactalis Group, Oceania Dairy, owned by Yili, Yashili NZ, Danone, Blue River Dairy, Canpac (Fonterra), and Bodco.
It could also opt to expedite Mataura Valley investment or invest in China.Regarding Mataura Valley, they expect it to cost around $150m to obtain the necessary blending and canning capability and lift capacity.For international companies to sell IF in China, registration is required for both the factory and the product.
Complex process
The issue, however, would be the SAMR and GACC approvals.Given the complex nature of the process, it seems unlikely Mataura Valley would gain approval imminently.Regarding Dunsandel, they note that Bright Dairy is an important consideration.Bright Dairy is a 39% shareholder of SML and currently has four seats (50% of the total) on SML's board. Bright Dairy & Food Co is a listed subsidiary of Bright Food.
“A key consideration given SML's well-publicised balance sheet concerns is if SML's largest shareholder would prioritise selling SML's flagship asset. A sale at asset values we have used in our scenarios would materially improve SML's balance sheet,” they said.
However, while SML has been an underperforming asset for Bright Dairy, given Bright's low-geared balance sheet and continued desire for international asset exposure, there appears to be no “forced” reason for Bright to sell its SML stake.
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