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What can A2 Milk (ASX:A2M) investors learn from the Synlait (ASX:SM1) HY21 result?

The Synlait Milk Ltd (ASX: SM1) share price is down more than 3% after announcing its FY21 half-year result. What can A2 Milk Company Ltd (ASX: A2M) shareholders learn?

The Synlait numbers

Synlait reported that revenue went up 19% to $664.2 million, with Dairyworks revenue of $112.6 million.

EBITDA (EBITDA explained) dropped 29% to $47.7 million and net profit after tax (NPAT) fell 76% to $6.4 million.

The company said that consumer-packaged infant formula sales went down 16% to 18,085 MT, though lactoferrin production rose 16% to 13.6 MT.

Synlait continues to face challenging conditions, volatility and headwinds.

FY21 expectations

Synlait said there continues to be uncertainty with A2 Milk demand for the rest of FY21 and FY22 and it does not have the confidence to forecast when a recovery will occur.

The company’s ingredients business is hurting because of the infant formula demand drop, combined with rapidly rising dairy prices, foreign exchange and a changing product mix.

It also pointed to global shipping delays which are expected to continue and impact the FY21 result.

Consequently, the company is broadly expecting NPAT to be breakeven in the current circumstances.

While all banking covenant ratios were met during HY21, Synlait has proactively engaged with its banking syndicate to increase its leverage ratios to manage any risk at the end of FY21. The FY21 business plan is fully funded by its current banking syndicate.

Management comments

Synlait CEO Leon Clement said: “We cannot control COVID-19 but we can control our response. Our focus is now to mitigate the impact of COVID-19 has had on our customers, as we manage costs and capacity and pull forward value creation initiatives to accelerate the execution of our strategy.

We will need time to get through this, but we remain confident about our future. Our investment phase is complete. We have the capacity, capability and customer base to generate significant value. COVID-19 hit us late, but we will emerge from the pandemic a stronger, more sustainable Synlait.”

What can A2 Milk shareholders take from this?

Not much positivity it seems. The uncertainty and lower demand continues to impact Synlait and A2 Milk, so I’m not confident of seeing a recovery in the final quarter of FY21.

There’s a chance that this is actually the right time to buy – when the outlook seems the bleakest. But it’s impossible to know when, or if, there will be a recovery in demand. Other parts of the A2 Milk business are going well – such as liquid milk and in mother and baby stores (MBS) across China.

Plenty of ASX growth shares are not facing the level of disruption that A2 Milk and Synlait currently are.

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