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A2 Milk Company supplier Synlait Milk Ltd sinks 10% despite an 89% jump in profits

It has been a disappointing day of trade for the Synlait Milk Ltd (ASX: SM1) share price.

In morning trade the dairy processor’s shares were down as much as 10% to $10.52 before recovering slightly. At the time of writing its shares are down 5% to $11.09.

Why are its shares sinking lower today?

This morning Synlait Milk released its full year results and revealed a stunning 89% year-on-year increase in profit to NZ$74.6 million.

As you might expect, this was driven largely by increasing demand for consumer packaged infant formula. Management advised that infant formula sales volumes grew 89% during the 12 months.

Synlait is a supplier of infant formula to the likes of A2 Milk Company Ltd (ASX: A2M), Munchkin’s 100% Grass Fed, Akara, and Pure Canterbury.

What’s next?

Looking ahead, management undertook a number of capital projects in FY 2018 aiming to unlock opportunities and pursue profitable growth across categories.

One such project was the purchase of 28 hectares of land in Pokeno in February. The company is building a new infant formula-capable manufacturing facility on the site and recruiting milk suppliers in the area. Management believes it will allow Synlait to keep up with customer demand, whilst also eliminating its single-site risk.

In light of this, the continued growth of a2 Milk’s sales, and the potential SAMR (CFDA) approvals for the Akara and Pure Canterbury brands, management has forecast infant formula sales volumes growing from 35,580MT to between 41,000MT and 45,000MT in FY 2019. This represents annual growth of 15% and 26.5%.

This is a significant slowdown on FY 2018’s growth and I suspect it could be the reason for today’s selloff.

Should you buy the dip?

Based on its earnings per share of 41.6 NZ cents (37.9 Australian cents), Synlait’s shares are changing hands at 29x earnings today.

I think this is a touch expensive given its slowing growth and would sooner invest in either a2 Milk or rival Bellamy’s Australia Ltd (ASX: BAL). I believe they offer a more compelling risk/reward than Synlait’s shares right now.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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