Good morning,

The pressure is on for Synlait Milk to divest its cheese manufacturing subsidiary – or so say sell-side analysts.

In a research note, Bell Potter analyst Jonathan Snape said releasing value from Dairyworks is essential to turning around the company’s souring share price – down 60 per cent over the past year to an all-time low of $1.19.

Annual results released on Monday outlined a challenging set of numbers including an 18 per cent fall in EBITDA. Net profit after tax fell to $NZ2.5 million from $NZ38.5 million last year.

It gets worse. Net debt is at $NZ413 million and over the next 18 months, Synlait is locked in to repay $NZ130 million of bank debt and $NZ180 million of retail bonds. Management declined to issue guidance.

Jarden was brought on earlier this year to advise on the sale of Synlait’s consumer foods businesses Dairyworks and Talbot Forest Cheese. Dairyworks is expected to fetch up to $130 million – funds that would go a long way to repaying its debt.

Snape estimates that at a $NZ116 million net asset value, the sale would bring Synlait’s net debt/EBITDA from around 4.3-times to around 3.9-times in FY23.

Forsyth Barr analyst Matt Montgomerie also has a close watch on Synlait’s debt levels, describing its balance sheet as an “area of concern”.

“Looking ahead, should the Dairyworks sale occur, we believe the risk of equity raising is low,” he said in a research note. “However, should the sale not proceed or if timing slips, a capital raise cannot be ruled out — we forecast pro-forma net debt of around $NZ360m and net debt to EBITDA of 3.0-times versus Synlait’s covenant of 3.50-times.”

Synlait management is confident of the Dairyworks divestment in the next 12 months. Naturally, the company has other assets it could tap – manufacturing sites in Auckland, Pokeno and Beijing-approved Dunsandel.

All this is happening against the backdrop of an escalating feud with key partner A2 Milk, which last week cancelled the exclusive supply arrangement for infant formula it has with Synlait. Synlait has pledged to fight the action.

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