Synlait Milk (ASX:SM1) share price on watch after earnings halve due to a2 Milk (ASX:A2M) update

The Synlait Milk Ltd (ASX:SM1) share price could be hammered on Monday after halving its FY 2021 guidance due to weak demand from A2 Milk Company Ltd (ASX:A2M)…

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The Synlait Milk Ltd (ASX: SM1) share price will be on watch today after it released an update on its guidance.

This follows a disappointing update by its largest customer, A2 Milk Company Ltd (ASX: A2M), on Friday.

That update revealed that A2 Milk Company has experienced a more significant and protracted disruption in the daigou channel than expected. As a result, it downgraded its sales and earnings guidance materially for FY 2021.

What did Synlait announce?

This morning the dairy processor updated its FY 2021 guidance to reflect a revised demand forecast received from the infant formula company following its guidance update.

According to the release, the updated forecast from a2 Milk Company has resulted in Synlait forecasting total consumer-packaged infant formula volumes to be approximately 35% lower than FY 2020.

As a result of this change, based on initial estimates and currently available information, management expects its FY 2021 net profit after tax to be approximately half that of its FY 2020 profit result.

The company intends to provide investors with a further update on its FY 2021 profit expectations with its half year results in March.

What now?

The dairy processor’s board and management team revealed that they are continuing to actively pursue opportunities to mitigate the impact of this development. This includes focusing on the execution of its diversification strategy, asset optimisation, and prudently managing costs.

It also advised that there has been no disruption to manufacturing or demand for Synlait’s ingredient, lactoferrin, or consumer-goods businesses, and remains confident that it can deliver on its medium to long term objectives.

However, the company warned that its guidance remains subject to the ongoing effects of COVID-19, with consumer behaviour, channel dynamics, and supply chain disruptions all subject to change.

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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 and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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