Synlait’s shares drop, sale of Dairyworks cheese business postponed

NEW ZEALAND – Synlait’s reports downfall in shares on the New Zealand and Australia stock exchanges following the announcement that the sale of its Dairyworks cheese business has been postponed.

Synlait’s shares closed down 5.4% at US$0.27 in New Zealand and 2.3% at US$0.29 in Australia. The Dairyworks cheese operation was initially put on the market last June as Synlait aimed to focus on its B2B infant formula and food service businesses.

Despite interest from various parties, a binding offer at an acceptable level has yet to materialize, leading Synlait to abandon the sale process.

This news comes after a challenging FY23 for Synlait, marked by significant reductions in customer demand, extreme weather events, inflationary impacts, ongoing investments in new product workstreams, and the launch of a new enterprise resource planning (ERP) system.

However, looking ahead to FY24, Synlait anticipates potential challenges in the China market, softening global conditions, and continued inflationary pressures in China, which could impact future customer demand and overall profitability.

The company expects Advanced Nutrition volumes to grow at the Pokeno site and anticipates improved EBITDA performance in FY24 compared to FY23.

Despite the cancellation of exclusivity arrangements under the Nutritional Powders Manufacturing and Supply Agreement (NPMSA) for the a2 Platinum and other nutritional products by The a2 Milk Company, Synlait’s FY24 results are not expected to be affected.

Synlait remains committed to its refreshed strategy to create a more focused entity and is on track to meet its five-year strategic ambitions by FY28.

As of January 31, 2024, Synlait recorded an after-tax loss of US$96.2 million for the six months, operating cash outflows of US$98.1 million, and a working capital deficit of US$204.9 million.

The company’s directors have concluded that while preparing financial statements on a going-concern basis is appropriate, material uncertainties may significantly affect the group’s ability to continue trading.

Meanwhile, Synlait’s largest shareholder, China’s Bright Dairy, holds a 39% stake and has provided a US$80.2 million loan to help meet debt repayment obligations.

The company is also negotiating with creditors for further debt waivers. Farmer suppliers have threatened to withdraw from service agreements unless Synlait reduces its debt.

The Bright Dairy loan covers a missed repayment that Synlait revealed in March. It has been extended to July 15. The company also plans to seek an equity raise.

Chairman George Adams expressed gratitude for Bright Dairy’s support and mentioned ongoing work on the shareholder loan and future equity raise.

Manonit’s farmer suppliers have also submitted cessation notices, indicating potential withdrawal from service agreements in FY26 unless the company’s financial performance improves.

Retaining milk supply remains a critical priority, with suppliers seeking to see Synlait’s balance sheet deleveraged to allow for increased advanced rates.

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