Investors punished Synlait Milk shares after the dairy processor was forced to wind back the bullish profit forecast it gave in January because of disruptions from increased Chinese regulations on infant formula and unfavourable foreign exchange movements.
The stock dropped 7.3 percent to a three-week low of $3.70, trimming their gains from last year’s initial public offering to 68 percent. The full-year profit forecast was cut to a range of $25 million to $30 million, down from the $30 million-to-$35 million estimate given in January, Synlait said today.
“In January we under-estimated the full impact,” managing director John Penno told BusinessDesk. “The Chinese regulations had been signalled for some time but what’s become apparent since December is how fast they are going to move.”
“Whenever changes of this magnitude happen, various companies start standing back and not committing to powder,” he said.
In December, China’s State Food and Drug Administration unveiled revised regulations covering product safety control, purchase of raw materials, formula product inspection, manufacturing process and product traceability for infant formula, the state newswire Xinhua reported at the time. The changes are part of China’s response to the tainted milk scandal in 2008 which left six babies dead,
sickened 300,000 and damaged confidence in Chinese dairy products.
Under the revised rules primary liability for infant formula is sheeted home to the producers, who must comply with new licensing rules and register their formula, packaging and labels with provincial authorities. Producers must also have systems in place for product recalls.
Infant formula is a key market for Synlait, which projects sales into that sector will account for 30 percent of total product sold in 2015. Sales in the current year are now expected to be similar to 2013 and the company took a pretax provision of $5.8 million against its first half results to write down infant and nutritional inventories.
Synlait also disclosed a pretax cost of about $3.6 million for unfavourable foreign exchange rates compared to those it used to set its farm gate milk price, which it expects will be at a record this year.
“Investor expectations were pretty high,” said Grant Williamson, a director at brokerage Hamilton Hindin Greene. “The guidance got a little bit ahead of itself. A number of factors were outside the company’s control.”
Still, the Chinese formula market “has huge potential” and long term, “it still looks very exciting for the company,” he said. The shares had been trading “on relatively high fundamentals” running into today’s announcement.
Synlait had warned in January that it may fall short of its target of selling 10,000 metric tonnes of infant formula and nutritional products in China because of disruptions in that market caused by increased regulation.
The company’s full-year profit guidance is still well above its prospectus forecast of $19.8 million and Synlait said today it will bring forward some capital spending and make its second infant formula and nutritional spray drier 25 percent larger than had been planned. Most of its production is contract manufacturing either of fully made up and packaged products or ingredients that are then blended by customers and sold under their own brands.
The company is 39 percent owned by China’s Bright Dairy & Food. It won’t pay a dividend.