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Synlait (ASX:SM1) share price on watch after reporting huge profit decline

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The Synlait Milk Ltd (ASX: SM1) share price will be on watch on Monday morning.

This follows the release of the dairy processor’s half year results.

How did Synlait perform in the first half?

For the six months ended 31 January, Synlait reported a 19% increase in revenue to NZ$664.2 million.

This was driven by a 16% increase in lactoferrin production and the acquisition of Christchurch cheesemaker Dairyworks, which helped offset weakness in infant formulas sales.

However, things were not as positive for its earnings. Synlait reported a 29% decline in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$47.7 million.

And even worse was its bottom line performance, with its net profit after tax falling a disappointing 76% to NZ$6.4 million.

Management commentary

Synlait’s Chair, Graeme Milne, commented: “Our first half was challenging, and we continue to find ourselves in a period of significant uncertainty and volatility as Synlait faces into several headwinds. This is impacting our short-term operations and will impact our full year 2021 financial result (FY21).”

Synlait’s CEO, Leon Clement, added: “We cannot control COVID-19 but we can control our response. Our focus is now to mitigate the impact COVID-19 has had on our customers, as we manage costs and capacity and pull forward value creation initiatives to accelerate the execution of our strategy.”

“We will need time to get through this, but we remain confident about our future. Our investment phase is complete. We have the capacity, capability, and customer base to generate significant value. COVID-19 hit us late, but we will emerge from the pandemic a stronger, more sustainable Synlait.”

Outlook

Management has warned that the headwinds that its major customer, A2 Milk Company Ltd (ASX: A2M), is facing, means that demand is uncertain.

It explained: “Synlait is continuing to experience significant uncertainty and volatility within its business. This is due to ongoing uncertainty in The a2 Milk Company’s expected demand for the remainder of FY21 and FY22. Synlait does not currently have sufficient confidence to forecast when this recovery will occur. The resulting impact of this on Synlait’s business is two-fold: demand for consumer-packaged infant formula remains uncertain, which in turn impacts forward infant base powder production and asset use.”

It also warned that the sudden drop in consumer-packaged infant formula demand, combined with rapidly rising Global Dairy Trade prices, foreign exchange, and a changing product mix, is creating volatility which limits returns.

In light of the above, the company suspects that its operations may be breakeven in FY 2021.

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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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