Synlait Synlait Milk (SM1) is a business to business dairy...

Synlait
Synlait Milk (SM1) is a business to business dairy processing company, in Canterbury (south of Christchurch) in NZ. SM1 doesn’t own brands however they control the supply chain with farmer relationships and processing facilities and (will) control (CFDA and FDA) processing licences. SM1 is probably best known for its relationship with A2 Milk (A2M) as the exclusive supplier of infant milk formula (IMF) to A2M in Australia, NZ and China. SM1 has invested materially in the past 10 years with recent additions leaving the company with ample near-term capacity including; 3 spray dryers with ~140,000tpa capacity; two wet mix kitchens with IMF capacity to 80,000tpa; and two IMF canning facilities, the second being the acquisition of New Zealand Dairy Company in May, providing ~60,000tpa of canning capability.
In the past 5 years as capacity expanded sales volumes increased from ~55,000t in FY11 to 116,000t in FY16. During this time however gross profit increased ~5x from margin expansion from upscaling from base ingredients (whole milk powder, skim milk powder, etc.) to complete nutritional products (IMF). IMF can generate 10x the GM per tonne of base ingredients for Synlait. SM1 has given IMF production guidance of 28,000t in FY18. Beyond FY18 projections get a bit more challenging but it is our understanding SM1 (and hence A2M) are front of the queue for CFDA approval for Chinese labelled IMF products. This is important given consolidation of >2,000 IMF brands to ~500 has potential to create big winners and losers in the ~1Mtpa China IMF market.
We see a case where SM1 can grow to >50,000tpa of canned IMF in 5 years which provides a case for material margin expansion on a margin per tonne and overall gross margin basis.