Synlait Milk Ltd (ASX: SM1) has an announced an acquisition. Does this make Synlait shares a buy?
About Synlait Milk Ltd
Synlait Milk is a New Zealand based dairy processing company. They manufacture and sell a range of milk powder and milk powder related products including infant and adult nutritional formulations, functional food ingredients, and specialised products.
Synlait also has exclusive supply rights for A2 Milk Company Ltd’s (ASX: A2M) canned infant formula products in the Australia/New Zealand and China markets. a2 Milk is a 17.4% shareholder of Synlait.
Acquisition
Synlait has announced the conditional purchase of Dairyworks for $112 million, which is subject to approval from New Zealand’s Overseas Investment Office. Synlait said the acquisition price represents an approximate EBITDA multiple of 7.5 times.
Dairyworks operations are in Christchurch and the company supplies New Zealand with almost half of its cheese, a quarter of the country’s butter, as well as milk powder and ice cream. Dairyworks owns the cheese and butter consumer brands Dairyworks, Rolling Meadow and Alpine which are supplied to supermarkets in New Zealand and Australia.
Synlait CEO Leon Clement said, “this is an exciting opportunity for Synlait. This business is a great strategic fit for us and an important step in growing our presence in the Everyday Dairy Category”.
Is It A Buy?
The Synlait share price was above $12 in September last year. It’s now a touch above $9 per share.
Is this an opportunity to get in before the share price bounces? This has happened to other similar companies like Blackmores Limited (ASX: BKL), a2 Milk and Bellamy’s Australia Ltd (ASX: BAL) in recent years.
The market was underwhelmed with Synlait’s FY19 result, but I do think the business has longer term potential. However, I prefer less capital intensive companies, like the ones in the free report below.
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Disclosure: At the time of writing David owns shares in a2 Milk and Bellamy’s
