The Synlait Milk Ltd (ASX: SM1) share price has been amongst the worst performers on the All Ordinaries index on Friday.
The shares of the New Zealand-based dairy processing company and supplier to A2 Milk Company Ltd (ASX: A2M) fell almost 5.5% to $9.34 this morning following the release of an announcement relating to its Pokeno plant.
What was announced?
In February 2018 Synlait announced the conditional purchase of 28 hectares of land in Pokeno in the Waikato Region of New Zealand.
The company made the purchase in order to establish its second nutritional powder manufacturing site.
As the Pokeno land had been rezoned industrial land from grazing land, the company was confident the land covenants no longer remained relevant. This was confirmed when the High Court removed the covenant late last year and transferred the title to Synlait.
However, the High Court's decision was reversed unexpectedly on Thursday, leaving the company in limbo and putting the future of its Pokeno plant in question.
What now?
Management advised that the company will continue to engage with all parties involved and "is confident the covenants issue should be able to be resolved by the parties."
It remains committed to the location, with CEO Leon Clement advising that: "We intend to continue with our plans at Pokeno."
This certainly is a tricky situation for the company to be in. The Pokeno plant is well beyond the planning stage and is on course to be commissioned in time for the upcoming 2019/20 milk season according to a recent presentation.
If the plant is forced to close, then it could put a serious dent in its future growth and possibly impact a2 Milk Company's production. Though, given the investment it has made in the plant, I'd be very surprised if it came to that.
For now, I would suggest investors stay clear of Synlait and consider a2 Milk Company or Bellamy's Australia Ltd (ASX: BAL) instead.
