AUS
NZ
UK
CA
USA
IND
At a time where global equities markets are being hit hard due to the outbreak of coronavirus, essential and nutritional product companies have experienced some relief as the demand for their products has increased sharply all around the globe, particularly in China.
Instead of reporting about the negative impact of coronavirus on the business like many other companies, several nutritional product companies are announcing about their increasing scale of operations.
Today, the a2 Milk Company has announced regarding a partnership with Agrifoods to enter into the Canadian market. In addition to this, Synlait Milk Limited has announced that it has received the necessary approval from Overseas Investment Office which was required for the acquisition of Dairyworks Limited.
Let’s discuss these two announcements in detail.
The a2 Milk Company Enters into the Canadian market
Premium branded dairy nutritional company, the a2 Milk Company (ASX: A2M) has finally penetrated the Canadian market by establishing partnership with Agrifoods Cooperative via well-structured license agreement. In an update provided on Thursday, 12 March 2020, a2 Milk Company announced that it has entered into an exclusive licensing agreement with Agrifoods Cooperative for the production, distribution, sale as well as the marketing of a2 Milk™ branded liquid milk for the Canadian market.
The partnership with Agrifoods will allow A2M to leverage the brand development work it has already undertaken in North America and expand into the Canadian market with a well-respected partner and on the other hand, this partnership will Agrifoods with access to its IP and marketing assets of a2 Milk company as well as its proprietary systems and know-how relating to the sourcing and processing of a2 Milk™.
The company has been performing well in other regions as well. In China, the revenue for the first two months of 2H20 was above expectations and the company’s products are currently in great demand in the country due the coronavirus outbreak. In the first half of FY20, the company reported a revenue of $777.4 million from Asia Pacific business. Further, the ANZ segment reported revenue of growth of 10%.
China & other Asia segment revenue (Source: Company’s Report)
The half year results reflected the continued growth in the company’s infant nutrition segment with sales totalling $659.2 million, up 33.1% on the prior corresponding period. the company achieved strong growth in its liquid milk businesses in Australia and the USA, with sales across the Group totalling $104.4 million up 28.7%, Further the company delivered EBITDA margin of 32.6% which was better than expected due to its stronger underlying gross margin. At the end of the half-year period, the company’s balance sheet was in a strong position with no debt and a significant cash balance.
By AEDT 1:14 PM, A2M stock was trading at $14.760, down by 4.774%, with a market cap of around of $11.42 billion.
Synlait Milk Limited Receives Approval for Dairyworks acquisition
Synlait Milk Limited (ASX: SM1) has received Overseas Investment Office approval for the acquisition of Dairyworks Limited, a New Zealand leader in the Everyday Dairy category, with a growing Australian presence. The transaction price is set at $112 million, reflective of an approximate 7.1x EBITDA multiple (based on last twelve months of forecast earnings to 31 March 2020.
Acquisition Rationale
- Accelerates Synlait’s diversification strategy achieving instant scale in the Everyday Dairy category. Dairyworks has a strong market presence in cheese, retail butter and grocery channels, reducing Synlait’s site, customer, product and market risk;
- Talbot Forest and Dairyworks are a natural fit. Supply chain synergies over time through vertical integration with Talbot Forest Cheese;
- Provides an opportunity to extract more value from Synlait’s milk pool by moving closer to the consumer and owning more of the value chain;
- Dairyworks brings to Synlait an innovative, agile and nimble FMCG culture, which will help further expand the company’s category offerings and products;
- Financially attractive and immediately earnings per share accretive
Upon settlement of the transaction, it is expected that Dairyworks will make an EBITDA contribution of approximately $4 million in the remainder of FY20. This translates to a Net Profit After Tax contribution of approximately $2 million, after borrowing costs and deprecation. As a result of this, Synlait has reiterated its FY20 earnings guidance as per which its NPAT is expected to be in between $70 million and $85 million. Factors contributing to this performance include:
- incremental costs of the new Pokeno facility impacting standard manufacturing costs
- lower sales of infant base powders due to the China infant nutrition market consolidation
- higher SG&A costs due to increased business size and the continued focus on investing in future growth opportunities
- a positive impact of a full year of operation of the expanded lactoferrin facility, albeit with more pricing volatility
Earlier on 11 March 2020, SM1 had announced that it is going to acquire farmland that is in close proximity to its Dunsandel facility for $25.7 million which will provides a unique opportunity to the company to pursue on-farm sustainability initiatives and reduce its environmental footprint.
The land will provide Synlait with certainty over access to water and disposal of its factory processing water and will provide it opportunities to evaluate and trial sustainable farming practices and carry out on-farm research.
In response to coronavirus outbreak, Synlait Milk Limited recently confirmed there has been no material short-term impact on its financial performance and expects its FY20 profits to grow, with the rate of profitability increasing at least at a similar rate to that of FY19 over FY18. Synlait intends to release its half year 2020 financial results on Thursday 19 March.
By 1:19 PM, SM1 stock was trading at $4.730 with a market cap of around $873.22 million.
