A2 Milk’s contract manufacturer Synlait dives into trading halt

Synlait, which produces A2’s Platinum range of infant formula, says it has received ‘new information’ that could lead to it changing its earnings forecast.

Synlait produces A2 Milk’s Platinum range of infant formula under contract.

A2 Milk’s contract infant formula manufacturer has plunged into a trading halt, warning it may need to revise its earnings forecast.

Synlait Milk, listed on the New Zealand Stock Exchange, produces A2’s Platinum infant formula range and has been managing “several risks”, including securing new Chinese import registration, a tight labour market and inflation-fuelled cost blowouts.

It told investors on Friday that it has received “new information”, which could result in it changing previously released guidance to the market.

Last month , Synlait warned that its two year recovery plan had been pushed out from two to three years and it expected to deliver net profit of $NZ15m ($13.75m) to $NZ25m.

This compared with the company saying in December that it expects to enter next financial year with a “similar level of profitability experienced before FY21”. In the year to July 31, 2020, the company generated $NZ75.2m in net profit, a 9 per cent fall on 2019.

While demand for A2 infant formula has rebounded from a pandemic-sparked collapse of the Chinese daigou - or reseller - market in 2020, Synlait had been pinning its hopes on a mysterious “customer S”, widely believed to be US nutrition giant Abbott, which was expected to dominate its New Zealand production.

But details about a deal with the yet to be named customer have yet to be released. But chief financial officer Rob Stowell said late last month that raw material inventory was up 62 per cent, in part from “customer S preparation”.

Meanwhile chief executive Grant Watson said: “It has become increasingly clear that our two year recovery plan will now take three years. While underlying momentum is lifting, our full financial recovery will take longer than planned”.

“Key drivers of the guidance range include a reduction or delay in advanced nutrition demand, operational and SAP(systems, applications and products) stability challenges and an increasing cost base. This is on top of inflationary and interest rate pressures,” Mr Watson said.

“The focus of our leadership team remains on stabilising Synlait to ensure we have strong foundations to deliver sustainable and diversified growth across our customers, channels, categories, and geographies.”

In the past six months, Synlait’s shares have dived more than 32 per cent to $NZ2.14. Meanwhile, A2’s shares have jumped more than 8 per cent to $5.75, still a fair way off the record high of $20 it hit in mid 2020.

A2’s net profit jumped 22 per cent to $NZ73.8m ($67m) in the six months to December 31. Chief executive David Bortolussi attributed the gain to a strong uplift in China label infant formula sales, which soared 18 per cent.

This was despite China’s broader infant formula market plunging nearly 13 per cent as the country’s birth rate fell to a record low after doctors advised Chinese women not to fall pregnant within six months of a Covid-19 infection.

“I don’t underestimate the challenges ahead, but I think we’re in pretty good shape,” Mr Bortolussi said in late February.

“We are continuing to invest behind our brand, with an additional increase in marketing investment driving further gains in China brand health metrics and record market shares in China label channels.”

Overall A2’s China revenue jumped 54 per cent to $NZ471.6m, while earnings before interest, tax, depreciation and amortisation leapt 87.7 per cent to $NZ111.5m.