SML - Synlait Milk Ltd

[Rawz]

Blind Freddie could see the cap raise coming. Surely nobody is surprised or caught off guard?

[silverblizzard888]

I completely understand the share price dropping lower and lower due to the fact of the coming credit raise, however.most credit raises I have seen are announced after a trading halt is called with the CR price set from the preceding 3 days prior to the credit raise announcement etc? Because SML have been announcing they are going to credit raise and then trading has just continued? Isn’t this information material therefore will influence the share price (which it clearly is?) is there the chance the price will be set from the preceding 3 days prior to SML making their FIRST clear announcement to the market to credit raise?

The decline of the share price isn't necessarily all because of the capital raise, more so that if they can't raise capital then the shares could almost be worthless if they can't pay their debts and the assets get sold for scraps that only are enough to cover the debt. The share price has dropped a lot more lately because their debts are due, they are in a corner and there isn't any other option while also being at the mercy of A2.

Capital raising was always needed, but management somehow found themselves caught in the 5 stages of grief. First they denied that capital raising was necessary, then they displayed anger at the mention of it, while trying to bargain their way out by selling Dairyworks, they couldn't sell dairyworks, the company's prospects continued to decline so they got depressed and then now they finally accept they need to raise capital. All this while they could have raise capital earlier and at a much higher price.

Usually trade halts are called for material announcements that maybe be leaked and cause the share price to be unevenly traded to the detriment of existing shareholders. Here we have slowly descended into this and there is no terms for the capital raise, just more or less than one will happen. The whole market is properly informed so there is no need for a trade halt. You can look over at NTL in the same situation, they have declared a capital raise is imminent too.

Will the capital raise greatly affect the existing shares? Yes very much so, anyone buying right now should know a capital raise is coming end of August or afterwards; right after they have had the chance to negotiate the sales of their assets and to get a fair idea of how much left they need to raise to fill the gap. They have been in discussions for Dairyworks for a long time now and had interested buyers, so they will chase those leads back up, offer a discount and try to get it sold asap. North Island assets will take longer to discuss, so their aim will be to get atleast over $180m to pay back the bonds, since their loan with Bright can last over a year so they can wait till they've sold their North Island assets before paying Bright back or at least thats what makes more sense.

[carrom74]

Given the volume of trade in recent days and A2 not keen in supporting the loan. Wonder whether they are selling?? … SH notices should address this soon . I know this sounds crazy. But with Synlait anything is possible!

[silverblizzard888]

Given the volume of trade in recent days and A2 not keen in supporting the loan. Wonder whether they are selling?? … SH notices should address this soon . I know this sounds crazy. But with Synlait anything is possible!

A2 needs to retain its shareholdering for the SAMR to show a close relationship. In past meetings they have mentioned that there are companies with 1% ownership that show a close relationship. With capital raising coming and a good chance they won't participate, they will be fairly diluted, so selling any shares now would come at a risk of undermining that close relationship. Not worth salvaging a few million to wreck a billion dollar business.

[Bikeguy]

The decline of the share price isn't necessarily all because of the capital raise, more so that if they can't raise capital then the shares could almost be worthless if they can't pay their debts and the assets get sold for scraps that only are enough to cover the debt. The share price has dropped a lot more lately because their debts are due, they are in a corner and there isn't any other option while also being at the mercy of A2.

Capital raising was always needed, but management somehow found themselves caught in the 5 stages of grief. First they denied that capital raising was necessary, then they displayed anger at the mention of it, while trying to bargain their way out by selling Dairyworks, they couldn't sell dairyworks, the company's prospects continued to decline so they got depressed and then now they finally accept they need to raise capital. All this while they could have raise capital earlier and at a much higher price.

Usually trade halts are called for material announcements that maybe be leaked and cause the share price to be unevenly traded to the detriment of existing shareholders. Here we have slowly descended into this and there is no terms for the capital raise, just more or less than one will happen. The whole market is properly informed so there is no need for a trade halt. You can look over at NTL in the same situation, they have declared a capital raise is imminent too.

Will the capital raise greatly affect the existing shares? Yes very much so, anyone buying right now should know a capital raise is coming end of August or afterwards; right after they have had the chance to negotiate the sales of their assets and to get a fair idea of how much left they need to raise to fill the gap. They have been in discussions for Dairyworks for a long time now and had interested buyers, so they will chase those leads back up, offer a discount and try to get it sold asap. North Island assets will take longer to discuss, so their aim will be to get atleast over $180m to pay back the bonds, since their loan with Bright can last over a year so they can wait till they've sold their North Island assets before paying Bright back or at least thats what makes more sense.

You sum it up very well, thank you for such an in-depth post

[nztx]

Wonder if ASX will pull a random boomerang trick on listing across the ditch for SNL , like they
did for NTL - if the Auditor gets it's t*ts in a tangle on whether a going concern exists here or not ?

[Newman]

The decline of the share price isn't necessarily all because of the capital raise, more so that if they can't raise capital then the shares could almost be worthless if they can't pay their debts and the assets get sold for scraps that only are enough to cover the debt. The share price has dropped a lot more lately because their debts are due, they are in a corner and there isn't any other option while also being at the mercy of A2.

Capital raising was always needed, but management somehow found themselves caught in the 5 stages of grief. First they denied that capital raising was necessary, then they displayed anger at the mention of it, while trying to bargain their way out by selling Dairyworks, they couldn't sell dairyworks, the company's prospects continued to decline so they got depressed and then now they finally accept they need to raise capital. All this while they could have raise capital earlier and at a much higher price.

Usually trade halts are called for material announcements that maybe be leaked and cause the share price to be unevenly traded to the detriment of existing shareholders. Here we have slowly descended into this and there is no terms for the capital raise, just more or less than one will happen. The whole market is properly informed so there is no need for a trade halt. You can look over at NTL in the same situation, they have declared a capital raise is imminent too.

Will the capital raise greatly affect the existing shares? Yes very much so, anyone buying right now should know a capital raise is coming end of August or afterwards; right after they have had the chance to negotiate the sales of their assets and to get a fair idea of how much left they need to raise to fill the gap. They have been in discussions for Dairyworks for a long time now and had interested buyers, so they will chase those leads back up, offer a discount and try to get it sold asap. North Island assets will take longer to discuss, so their aim will be to get atleast over $180m to pay back the bonds, since their loan with Bright can last over a year so they can wait till they've sold their North Island assets before paying Bright back or at least thats what makes more sense.

Excellent analysis on a technical level. On a strategic level, what would happen if Bright (or someone behind it) wants to move capital from the USA to New Zealand for security reasons?

[silverblizzard888]

Excellent analysis on a technical level. On a strategic level, what would happen if Bright (or someone behind it) wants to move capital from the USA to New Zealand for security reasons?

Then they would bring the money to NZ and Synlait would be a great reason to if they had capital in that area and wanted it in NZ. Not sure I get the motive of your question.

[silverblizzard888]

It seems Synlait's gross margin dropped significantly the minute Pokeno came online in late 2019, dropping from 16% to 5%, then later recovering to 9% with products being produced at Pokeno, though that has sinced dropped in the half year report to just over 4%. Makes me suspect that Pokeno maybe losing Synlait over $100m a year, especially in maintaining their milk supply contracts while not having the volume they had planned for. Explains why management have always kept hope that bringing in new business would solve the problem, but the new business never materialized. Add in over $40m in financial cost associated with their debt and you have over $140m going out the window from Pokeno and the debt, which if resolved would bring them back to profitability very quickly.

We know Dunsandel and Dairyworks are both very profitable operations, so if they were to get rid of Pokeno or sell off a large part and reduce debt at the same time, they would be profitable again. It never made sense how their margins dropped so heavily since they pay a similar milk price to Fonterra and for a long time was always in the double digits till Pokeno came online, yet Fonterra maintains healthy margins in the teens while Synlaits are in the single digits. A recent interview from the Chair of Synlait makes me suspect that this is the case.

https://www.nzherald.co.nz/business/...NBRSFGXQCXN7E/

“We have a very profitable business in Dunsandel [in Canterbury] - it’s a really strong business.”

Likewise, the consumer-oriented Dairyworks, which Synlait wants to sell to pay down debt, is also very profitable, he adds.

“So we have got two core assets that do very well."

Adams said Synlait needed to address issues of profitability and, clearly, Pōkeno.

“And in reality, if we can get to a point where we can resolve Pōkeno, and I am confident that we will, then the profitability of the other two will not get sucked into Pōkeno, which is the issue,” he said.

“We use the term ‘holding the nose’, but at that stage, if we deal with Pōkeno and we do what we are planning to do in terms of capital raise, then yes, it is positively salvageable.”

[Bikeguy]

It seems Synlait's gross margin dropped significantly the minute Pokeno came online in late 2019, dropping from 16% to 5%, then later recovering to 9% with products being produced at Pokeno, though that has sinced dropped in the half year report to just over 4%. Makes me suspect that Pokeno maybe losing Synlait over $100m a year, especially in maintaining their milk supply contracts while not having the volume they had planned for. Explains why management have always kept hope that bringing in new business would solve the problem, but the new business never materialized. Add in over $40m in financial cost associated with their debt and you have over $140m going out the window from Pokeno and the debt, which if resolved would bring them back to profitability very quickly.

We know Dunsandel and Dairyworks are both very profitable operations, so if they were to get rid of Pokeno or sell off a large part and reduce debt at the same time, they would be profitable again. It never made sense how their margins dropped so heavily since they pay a similar milk price to Fonterra and for a long time was always in the double digits till Pokeno came online, yet Fonterra maintains healthy margins in the teens while Synlaits are in the single digits. A recent interview from the Chair of Synlait makes me suspect that this is the case.

https://www.nzherald.co.nz/business/...NBRSFGXQCXN7E/

“We have a very profitable business in Dunsandel [in Canterbury] - it’s a really strong business.”

Likewise, the consumer-oriented Dairyworks, which Synlait wants to sell to pay down debt, is also very profitable, he adds.

“So we have got two core assets that do very well."

Adams said Synlait needed to address issues of profitability and, clearly, Pōkeno.

“And in reality, if we can get to a point where we can resolve Pōkeno, and I am confident that we will, then the profitability of the other two will not get sucked into Pōkeno, which is the issue,” he said.

“We use the term ‘holding the nose’, but at that stage, if we deal with Pōkeno and we do what we are planning to do in terms of capital raise, then yes, it is positively salvageable.”

Fantastic post, appreciate your work,
Your thoughts on the probability of them announcing an asset sale prior to announcing the CR?