Is the Synlait Milk Ltd (ASX: SM1) share price a buy for its acquisition and the growth strategy?
Investors haven’t been impressed by the announced acquisition, with the share price down 0.6% at the time of writing.
What is Synlait acquiring?
This morning Synlait announced the conditional purchase of Dairyworks for NZ$112 million, subject to Overseas Investment Office approval.
Dairyworks has been operating for almost two decades and is based in Christchurch where it supplies almost half of New Zealand’s cheese, a quarter of the country’s butter, milk powder and Deep South ice cream. It also owns the cheese and better consumer brands Dairyworks, Rolling Meadow and Alpine which are supplied to supermarkets in New Zealand and Australia.
The acquisition represents a valuation of 7.5x the earnings before interest, tax, depreciation and amortisation (EBITDA) of the last twelve months.
Synlait said this acquisition will provide with another meaningful move towards the delivery of the company’s ‘Everyday Dairy’ strategy and will work well with its acquisition of cheese manufacturer Talbot Forest.
The CEO of Synlait, Leon Clement said “This is an exciting opportunity for Synlait. This business is a great strategic fit for us and an important step in growing our presence in the Everyday Dairy category.
“Opportunities exist in both businesses to streamline supply chains and enhance our competitiveness. It gives us the ability to optimise how we process milk solids and get the most value from our supply of milk. We’re exciting by this opportunity as we work to capture more value in the dairy market in New Zealand and globally.”
This acquisition diversifies Synlait’s earnings further, although some investors may question if it will be good for long-term profit growth. At only 14x FY21’s estimated earnings it could be a pretty good option today.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.