The Synlait Milk Ltd (ASX: SM1) share price looks likely to crash lower on Wednesday following the release of the dairy processing company's half year results.
Here's how the supplier to A2 Milk Company Ltd (ASX: A2M) performed in the first half compared to the prior corresponding period:
- Revenue increased 7% to NZ$471 million.
- Cost of sales increased 9% to NZ$385.1 million.
- EBIT fell 9% to NZ$56.5 million.
- Net profit after tax dropped 9.7% to NZ$37.3 million.
- Earnings per share down 9.7% to 20.8 NZ cents.
- Re-confirmed guidance for canned infant formula volumes of 41,000 – 45,000 MT.
What happened in the first half?
I thought this was a surprisingly weak result from Synlait and I can't say I'm surprised to see that its New Zealand-listed shares are trading almost 18% lower in early trade.
Management advised that canned infant formula volumes were up 5% on the prior corresponding period to 17,684 MT, but these were at lower margins.
This was the result of the new pricing agreement entered into with a2 Milk Company last July, as well as not having the benefit of the higher margin sales to its China-based customers. These brands are still awaiting State Administration for Market Regulation (SAMR) registration.
Looking ahead, management advised that it is on track to achieve its full year canned infant formula (IFC) volume guidance of between 41,000 – 45,000 MT.
Significantly higher volumes are forecast to be delivered in the second half of FY 2019 compared to the second half of FY 2018, which saw only an 11% increase on the first half. The volume growth is expected to be driven by strong growth in a2 Milk Company's Platinum brand of infant formula.
In light of this, management has maintained its outlook that full year profitability is expected to increase in FY 2019, but not at the same rate as a year earlier.
Should you invest?
Based on this result and the deterioration in its margins, I would stay clear of Synlait's shares for the time being and consider a2 Milk Company or Bellamy's Australia Ltd (ASX: BAL) instead.
