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Its more the fact that Synlait still produces a great profit and continues to grow its revenue and some development in Dunsandel is being carried out. In a way investors haven't really included much of Pokeno into their valuation. Investors still more focused on the profits that are generated at the current sites and going forward if its likely to stay similar, and with a PE of 25 its not exactly expensive.
PE of 25 not expensive? I guess you need a lot of sustainable growth built in to justify this PE - and I am wondering how they are going to maintain this growth if they can't open their next factory.
But then SP = f(PE) + f(growth) + f (hype), and it appears hype is still substantial. Just a bit dangerous to rely on it, hype tends at some stage to fade when reason eventually sets in ;);
There is a lot of sustainable growth coming in, just not massive growth that Pokeno would have brought.
-$125m liquid milk dairy packaging facility at Dunsandel
-Acquisition of Talbot Forest Cheese $30 -$40m.
-$19m expansion to its Dunsandel lactoferrin facility doubles its lactoferrin manufacturing capacity.
Well yes, but look at all this growth:
Liquid mild: Not much margin in that, particularly given they sell it as one of the supermarket house brands. Added revenue - sure, but earnings growth? Hardly;
Talbot cheese: Not particularly profitable either - and anyway (looking at the revenue) just peanuts ...
Lactoferrin: Yes, sometimes highly profitable - and sometimes not. World market price of lactoferrin looks similar to a rollercoaster over time: huge ups and downs, not really something you want to rely on for sustainable growth. And lets face it - while lactoferrin is an for mammals essential protein and a component of the immune system, I don't think that there is any evidence that eating (or drinking) additional lactoferrin removed from the milk it was in is really beneficial. Price is driven by hype, not by need ... but than, sometimes hype rules the world.
Well I hope this isn't skepticism for the sake of skepticism, but every path of growth starts with small margins and builds over the long term with more sustainable profits.
Liquid milk for supermarket brands is just the start, Synlait has stated that they will look for more unique products going forward and has considered more long life liquids and cultured ones too, but they have to build out scale first.
Talbot is a small acquisition, but once acquired they will have the brand and know how to expand out into the cheese market, especially if they have the funding to do so.
All industries will have ups and downs in pricing, but like the above two products, by adding more diversification of products in a sense it lowers the risk going forward and mixes in different products with different margins to create a sustainable growth path not reliant on one sole product or customer as they do now.
I think they just enjoy convincing that they have been right avoiding SML ;)
I also think the Pokeno thing is quite serious, given huge reduction in margin from their major customer ATM and chunk of future profitability from Pokeno site has already been priced in SP. PE of 25 for a manufacturing company sounds not inexpensive for sure.........
FWIW I got out yesterday with a healthy enough profit. I was happy to hold it, but this Pokeno mess (in particular the lack of disclosure) is something I find quite disturbing and has really damaged my confidence in the company. I'd rather put my money elsewhere until the current management team demonstrates a better ability to execute.