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FY21 update: Will Synlait (ASX:SM1) shares sink lower?

Synlait Milk Ltd (ASX: SM1) gave an update for its FY21 expectations. What will Synlait shares do in reaction?

Synlait is a company that works with 200 milk suppliers to create milk nutrition for global customers such as A2 Milk Company Ltd (ASX: A2M).

What did Synlait say?

It decided to update its FY21 guidance because of revised demand forecast received from A2 Milk after its market update last week. A2 Milk is a strategic customer and cornerstone shareholder of Synlait.

After that update, Synlait is now expecting total consumer-packed infant formula volumes to be approximately 35% lower than FY20.

With volumes expected to be lower, Synlait said that its initial estimates show that overall FY21 net profit after tax (NPAT) is going to be down approximately 50% compared to FY20.

Synlait said it would provide another update about its FY21 profit expectations at its FY21 half year result on 29 March 2021, or if other material information becomes available.

What can Synlait do in this situation?

The dairy nutrition business said its board and management continue to actively pursue opportunities to mitigate the impact of this development that include focusing on its diversification strategy, optimising assets and prudently managing costs.

There has been no disruption to manufacturing or demand for Synlait’s ingredient, lactoferrin or consumer-goods businesses, and Synlait remains confident that it can deliver on its medium to long term objectives.

Is Synlait a buy?

COVID-19 continues to play havoc with infant formula businesses and those linked to the sector.

It remains to be seen whether earnings will rebound or not when borders start opening up again. Will the daigou buying return for A2 Milk? Has Chinese demand for Australian (and New Zealand) products softened?

I’m leaning towards the thought that demand will return in the longer term, but the decline (particularly since A2 Milk’s AGM) has been worse than expected. The product is still viewed as high quality, so there’s a good chance – but no guarantee – that customers will return once this difficult period is over and the physical obstacles for retail customers are gone.

The deterioration is disappointing, there are other ASX growth shares that could deliver more earnings growth, sooner. I’m thinking of names like Pushpay Holdings Ltd (ASX: PPH) and EML Payments Ltd (ASX: EML).

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