One of the biggest movers on the Australian share market today has been the Synlait Milk Ltd (ASX: SM1) share price.
At the time of writing the dairy processing company's shares are up a massive 16% to $8.83. At one stage they were as much as 20% higher at a record-high of $9.12.
Why are Synlait Milk's shares on fire today?
This morning Synlait Milk released its interim results to the market which revealed a half-year profit of NZ$40.7 million on revenue of NZ$439.3 million. This was an incredible 283% and 52% increase, respectively, on the prior corresponding period and led to the company reporting earnings per share of 22.7 NZ cents (21.2 cents).
According to the release, the biggest driver of the strong result was increases in the manufacture and sales of its highest margin products.
Management revealed that the "growth trajectory of canned infant formula has continued with total consumer packaged volumes almost tripling from the same period last year and up 36% on the second half of last year."
Synlait Milk's major customer is of course market darling A2 Milk Company Ltd (ASX: A2M). It is the dairy company's exclusive manufacturer for the Australia, New Zealand and China market, and has been able to piggyback on a2 Milk's success.
Pleasingly, the company's cash flow generation of NZ$204.3 million for the 12 months ended 31 January 2018 has fully funded its capital expenditure program and enabled the reduction of debt to low levels. Net debt now stands at NZ$49.7 million, compared to NZ$147 million a year earlier.
Should you invest?
Based on today's result Synlait Milk's shares now change hands at around 21x annualised earnings.
I don't think this is overly expensive given its growth profile and could make it a great way to gain exposure to the infant formula boom outside of a2 Milk and Bellamy's Australia Ltd (ASX: BAL).
While there is a danger that it could be too reliant on a2 Milk and would be hit hard if the dairy company one day brought its manufacturing in-house, it is worth noting that a2 Milk is a major shareholder in Synlait. So it seems unlikely, at this point, that this would happen.
