What can A2 Milk Company Ltd (ASX: A2M) investors learn from the latest FY21 guidance given by Synlait Milk Ltd (ASX: SM1)?
The Synlait guidance
Synlait’s board and management have gone through a review of the impact of previously disclosed risks affecting Synlait’s performance. As a result of that review, it has altered its full year forecast for a few different reasons.
One reason is the expectation of ongoing shipping delays, which will result in the sale of same ingredient products occurring after the FY21 balance date.
Another reason is that Synlait is seeing lower prices for ingredient products than it would normally expect to achieve relative to prevailing market prices through a combination of sales phasing and volume pressure.
The third reason that Synlait referred to was the adoption of a more conservative approach to year-end inventory volume and valuation.
As a result of the above issues and ongoing difficult trading, it’s expecting to make a net loss after tax of between $20 million to $30 million in FY21.
Is Synlait in trouble with lenders?
Synlait said that its banking syndicate continues to be supportive and has granted a waiver of relevant covenants in FY21. The company is working constructively with the syndicate to ensure it has the appropriate funding for FY22.
The dairy business says that it does not intend to undertake a capital raising.
Management comments
Synlait CEO John Penno said: “I am disappointed to share this news with our investor base. As a team we are focused on closing out this year as well as we can, then resettling, and delivering a much-improved financial performance in FY22.”
What can A2 Milk shareholders take from this?
The situation continues to worsen for the two businesses. A2 Milk recently gave an update to shareholders about what it plans to do with its inventory situation. I don’t see things getting better during FY21. Hopefully this doesn’t continue into FY22 or else that will be another financial year with lower earnings.
It’s difficult to know whether this is just a temporary problem. Or whether Chinese demand is permanently lower, despite all of the strong demand over the previous decade.
The A2 Milk share price and Synlait share price may be longer-term opportunities, but it’s a bit of a flip of a coin. That’s not the type of investment I like to make.
There are other ASX growth shares which may have the potential to deliver earnings growth over the next couple of years.
