SML - Synlait Milk Ltd

[Newman]

With Brights backing Synlait to the ends of the earth, we are probably assured of a strong capital raise, enough to see them survive. How might things look after a capital raise and asset sales. Maximum dilution I imagine could get to $200m, but doesn't sound like they will get to that point yet as they want to rely on asset says. It would be a strong advantage for current stock owners if more of the proceeds to reduce debt come from asset sales.

My hypothetical math on the main components:
Dunsandel - Generating $72m NPAT or $100 NBT
Dairyworks - Generating $10 NPAT
Pokeno - Losing $100m
Debt Interest - $40m

$200m Capital Raise
$200m capital raise with 5% fees, enough to pay back the bonds and a fairly large dilution to work with. Capital raises always comes at a discount to the trading share price, so for prudence we will assume a 20 cent share raising price.

After Capital raise valuation
$200m at 20 cents + $49m market cap at 22.5 cents = $243.5m market value if the share price settles at 20 cents after the raise.

Asset sales
With Pokeno losing so much money, if they can sell off at least half for $150m that also reduces expenses by half + selling dairyworks for $80m, we would have $230m from asset sales minus say 5% for sales fees.

Total cash raised from capital raise and asset sales
$200m - fees of $10m = $190m
$230m - fees of $11.5m = $219.5m
Total = $409.5m

Let assume net debt has grown to $600m by the time all these events happen. Minus off $409.5m from net debt = $190.5m net debt.
Net Debt = $190.5m

Profit afterwards
Dunsandel $72m NPAT or $100m NBT
Pokeno -$50m
Debt Interest -$12.7m
($100m - $50m - $12.7m) - tax = $26.8m Profit

That would put them back into a profitable situation with interest rates coming down next year and some recovery of the dairy industry, Synlait will be able to work itself back up. It will generate enough profit to keep paying down debt or grow the business again.

If underutilization is Pokeno's only problem, Bright might have a solution: offering a milk price higher than Fonterra's and making good use of Pokeno's modern facility. The products can be sold to China at the expense of Fonterra's exports. Does Bright have to sell Pokeno at a big discount?

[silverblizzard888]

If underutilization is Pokeno's only problem, Bright might have a solution: offering a milk price higher than Fonterra's and making good use of Pokeno's modern facility. The products can be sold to China at the expense of Fonterra's exports. Does Bright have to sell Pokeno at a big discount?

Yeah unfortunately they haven't been able to find enough business volume to fill Pokeno's capacity especially with the lack of demand from China, which is a shame since they always had the mindset to grow the business. With so much debt involved and little way of paying it down its probably for the best that they get rid of Pokeno or atleast sell half of it off. They spent $450m building it and currently its on the books at $340m, which they expect they will have to sell it for even less, best hope is $300m for the whole thing. Its burning too much cash at the moment and its best to save the company than to try to protect sunk cost.

When you have two parts of the business being quite profitable, that being Dairyworks and Dunsandel but still posting massive losses, all arrows point to Pokeno being a major problem. Bright seems to really like the Pokeno business and the latest interview with the Bright CEO seem quite upbeat so potentially Pokeno could become a joint venture with Bright buying half of the factory for their own needs. Either way Synlait need Pokeno off their books because they don't have the financials to sustain it and given time is of the essence they have to be decisive now or risk it all falling apart.

[silverblizzard888]

A potential outcome for Synlait if they can't get things back in order.

Dairy farm Waitonui Milltrust in receivership

“The farms are worth about $160m and there’s about $60m worth of debt on the group,” he said.

“They’ve gone from that figure to nothing in that period of time?

Steven Bignell, a consultant with Taupō accountancy firm Strettons, said the group had been under pressure from the bank to sell farms.“I’ve never known a time when [banks have] been so tough, sending people letters to say ‘we’re not going to extend your loans any more’,” he said

With a receivership sale “you can basically put a line through a third of the value,”

And although several of the investors had dairy industry experience, “the key thing I dealt with is decisions need to be made from the grass roots up, not the other way around. People think it’s big things, it’s not, it’s 100 little things.”

https://www.nbr.co.nz/business/defun...er-farm-sales/

[Balance]

Yeah unfortunately they haven't been able to find enough business volume to fill Pokeno's capacity especially with the lack of demand from China, which is a shame since they always had the mindset to grow the business. With so much debt involved and little way of paying it down its probably for the best that they get rid of Pokeno or atleast sell half of it off. They spent $450m building it and currently its on the books at $340m, which they expect they will have to sell it for even less, best hope is $300m for the whole thing. Its burning too much cash at the moment and its best to save the company than to try to protect sunk cost.

When you have two parts of the business being quite profitable, that being Dairyworks and Dunsandel but still posting massive losses, all arrows point to Pokeno being a major problem. Bright seems to really like the Pokeno business and the latest interview with the Bright CEO seem quite upbeat so potentially Pokeno could become a joint venture with Bright buying half of the factory for their own needs. Either way Synlait need Pokeno off their books because they don't have the financials to sustain it and given time is of the essence they have to be decisive now or risk it all falling apart.

I suspect the Chinese will be happy for Synlait to keep Pokeno to produce for Bright to distribute into its network/channels in the Chinese market - strong hint from Bright's interview yesterday (as reported in the NZ Herald).

Can form in my mind now just how things are going to play out for Synlait, Bright & A2M in the next 3 years.

The opportunity on the bonds is gone - no offers toady.

So it's the head shares which will be worthwhile looking at once details of the CR are known.

[silverblizzard888]

I suspect the Chinese will be happy for Synlait to keep Pokeno to produce for Bright to distribute into the Chinese market - strong hint from Bright's interview yesterday as reported in the NZ Herald.

Can form in my mind now just how things are going to play out for Synlait, Bright & A2M in the next 3 years.

The opportunity on the bonds is gone - no offers toady.

So it's the head shares which will be worthwhile looking at once details of the CR are known.

The problem is if they want to keep Pokeno then where does the money come from to pay the debt in the short term? A $200m CR would certainly give Synlait a good 12 month buffer, but the cash burn is still too high and I don't seem them solving that cash burn anytime soon. I would much rather they sell off parts of it to decrease cash burn and reduce debt as much as possible. Ideally a $100m CR would leave current shareholders with more meat on the bone at this current value, a $200m CR almost takes all the reward away at least in the short-to-medium term anyway.

Yeah the bond yield is slowly returning back down to normal levels, was a great opportunity at 180% yield for sure, now at 65%.

[Balance]

The problem is if they want to keep Pokeno then where does the money come from to pay the debt in the short term? A $200m CR would certainly give Synlait a good 12 month buffer, but the cash burn is still too high and I don't seem them solving that cash burn anytime soon. I would much rather they sell off parts of it to decrease cash burn and reduce debt as much as possible. Ideally a $100m CR would leave current shareholders with more meat on the bone at this current value, a $200m CR almost takes all the reward away at least in the short-to-medium term anyway.

Yeah the bond yield is slowly returning back down to normal levels, was a great opportunity at 180% yield for sure, now at 65%.

If Bright utilises Pokeno to manufacture & produce for Bright, the game changes as the utilisation level will go up and up.

And believe you me, the banks and farmers will be most happy and eager to support Synlait then.

PS. I understand from my bank contact that the China banks are forming the bulk of the new banking syndicate to refinance Synlait.

[whatsup]

If Bright utilises Pokeno to manufacture & produce for Bright, the game changes as the utilisation level will go up and up.

And believe you me, the banks and farmers will be most happy and eager to support Synlait then.

PS. I understand from my bank contact that the China banks are forming the bulk of the new banking syndicate to refinance Synlait.

IMO they would still have a massive job convincing farmers to supply them with product, Im pretty sure that after the SML ballsup that most will trickle back to Fonterra and safety unless they of course paid over the odds for the milk which would be another nail in their coffin

[silverblizzard888]

If Bright utilises Pokeno to manufacture & produce for Bright, the game changes as the utilisation level will go up and up.

And believe you me, the banks and farmers will be most happy and eager to support Synlait then.

PS. I understand from my bank contact that the China banks are forming the bulk of the new banking syndicate to refinance Synlait.

Given Chinese interest rates are extremely low compared to NZ interest rates theres actually a huge premium lending here, so definitely quite appealing for them and I'm sure Bright is also pulling a few favours here and there. The problem is I'm not sure Bright has the need for that much product or else they would have already made big orders for Pokeno to produce, they have known for a long time where Synlait's issues have been and its still come to this moment in time. The banks and farmers main concern is that they get paid at the end of the day, if theres payment everyone is all too happy to keep things rolling.

[Ggcc]

IMO they would still have a massive job convincing farmers to supply them with product, Im pretty sure that after the SML ballsup that most will trickle back to Fonterra and safety unless they of course paid over the odds for the milk which would be another nail in their coffin

That is the number one question I have. Part of the reason is, I have heard that the Pokeno site can't find the supplies of milk farmers. They don't want to switch to Synlait. Maybe there might be more interest if Synlait's books look better.

[Bikeguy]

There are so many in-depth posts coming through, ( both for and against) this is a good site, thanks for the efforts guys,