Why the Synlait (SM1) share price is falling today

The Synlait Milk Ltd (ASX: SM1) share price is trading lower today following the release of a manufacturing supply agreement.

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The Synlait Milk Ltd (ASX: SM1) share price is trading lower today following the release of a manufacturing supply agreement.

At the time of writing, shares in the dairy processing company are down 2.44% to $4.80.

Let’s take a closer look and see what new deal Synlait signed.

What does Synlait do?

Synlait is a dairy processing company based in Canterbury, New Zealand. The company manufactures and sells ingredients and nutritional milk powders for infants, as well as specialised products for adults.

Synlait works with more than 200 milk suppliers that are located no further than 80km away from the manufacturing plant. This ensures consistent fresh milk that can cater to ongoing demand. Every hour, more than 9 tonnes of infant milk can be processed at its state-of-the-art facilities, which are said to be the largest in the southern hemisphere.

New agreement

According to the release, Synlait signed a manufacturing supply agreement with an established, global category leader. The company did not specify which strategic partner it took on board due to confidentiality terms.

Under the agreement, Synlait will manufacture, blend, and package nutrition products which include plant-based products. This will allow utilisation of its manufacturing chain to deliver consumer products to the market.

Synlait’s Pokeno and Auckland’s capacity are expected to be customised for processing and packaging. Capital expenditure is estimated to be around $70 million, which will be spread over two years. Commercial production is currently slated to begin in mid-2022.

The agreement will have a positive impact on earnings in FY23.

What did the CEO say?

Commenting on the new deal, Synlait CEO Leon Clement said:

This is the start of a valuable, enduring, strategic partnership that gives us broader market and category exposure in Asia Pacific.

Asian markets are experiencing strong sector growth as consumers seek nutritional products that support better health. Synlait is excited to play a role in this journey. This is a significant step forward for us as we genuinely diversify our customer, category and geographic reach.

Synlait share price summary

The dairy processor’s shares have been on a steady decline from April, falling from $7.25 to $4.83. This reflects a 33% loss. Earlier, the Synlait share price dipped to a multi-year low of $4.33 in March due to the impact of COVID-19, and is only slightly up since then.

The company has a market capitalisation of $883.5 million and a price-to-earnings ratio (P/E) of 17.

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