Synlait Milk Ltd (ASX: SM1) has decided to conduct a capital raising at a share price of NZ$5.10. Should you take part?
Synlait’s capital raising
Synlait is going to raise around NZ$200 million, with NZ$180 million raised through an institutional raising and NZ$20 million in a share purchase plan.
What will the money be used for?
The first portion of the money will be used to complete the investment phase of its strategy including the customisation of Synlait Pokeno and Auckland for processing and packaging equipment to service its new multinational customer.
The rest of the money will be used to strengthen its balance sheet to provide more financial headroom as it navigates COVID-19. The money will also be used to create capacity to “deliver on its purpose: Doing milk differently for a healthier world.”
Capital raising details
Management said that the equity raising has been structured with the objective that almost all eligible existing shareholders have the opportunity to receive at least their portion of new shares being offered.
Existing large shareholders Bright Dairy and A2 Milk Company Ltd (ASX: A2M) have committed to take up their allocations, and guaranteed allocation amounting to approximately $114 million in total which have been excluded from the underwriting. The rest is fully underwritten.
The NZ$5.10 capital raising share price is a 14% discount to the last traded price, and a 6.6% discount to the 5-day average share price.
Investors like you and me (if we were shareholders) will be able to buy up to NZ$50,000, or AU$47,000, of new shares.
FY21 guidance
The company now expects its consumer-packaged infant formula volumes to be lower than FY20, with softer demand in the first half of the year than previously expected as “our key customer resets its own inventory levels”.
However, Synlait still expects volumes to increase in the second half of FY21 once stocks have cleared. The December half-year profit is expected to be “significantly lower” than the first half of FY20.
It’s now expecting the FY21 full year profit to be the same or slightly below FY20 profit as it focuses on its assets and manufacturing efficiencies.
Summary thoughts
Synlait is doing what it thinks is right for the long term growth and stability of the business. A 14% reduction is a pretty sizeable discount for the raising, particularly with today’s likely market increase.
However, in my opinion Synlait doesn’t offer the scalability of other ASX growth shares. I’d actually prefer to buy A2 Milk shares because it’s the one that’s growing globally and could be priced cheaply at today’s price.
