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What can A2 Milk (ASX:A2M) investors learn from the Synlait (ASX:SM1) FY22 result?

Owners of A2 Milk Company Ltd (ASX: A2M) shares will want to know about the FY22 result from Synlait Milk Ltd (ASX: SM1).

Synlait is a major supplier to A2 Milk. A2 Milk also owns around a fifth of the business. So, the performance and commentary of Synlait can have an impact on A2 Milk.

Synlait FY22 result

Here are some of the financial highlights from the report:

  • Revenue went up 21% to $1.66 billion
  • EBITDA (EBITDA explained) increased $91.8 million to $129.1 million
  • Adjusted/underlying EBITDA increased $79.8 million to $117.2 million
  • Adjusted net profit jumped $62.4 million to $34 million
  • Statutory net profit went up $67 million to $38.5 million
  • Operating cashflow soared $214.5 million to $232.9 million
  • Net debt dropped 29% to $341.9 million

Synlait said that this year was a year of refocusing, rebuilding revenue, reducing unnecessary costs, releasing working capital and decreasing capital expenditure.

Its ingredients business has returned to historical profitability and the nutritionals business returned to growth while it continued to invest.

A final average base milk price of $9.30 for the 2021 to 2022 season was also announced, the highest base milk price Synlait has paid. It also paid an average of $0.29 as incentives, taking the total average milk payment to $9.59.

This record milk price resulted from the constrained global milk supplies and consistent global demand for dairy products, as well as the strength of the US dollar against the New Zealand dollar.

Synlait also outlined its refreshed strategy which aims to reduce concentration risk and deliver diversified growth. It has also increased its focus across milk supply, food service and the China market.

Owners of A2 Milk shares may also be interested in the FY23 guidance.

Synlait FY23 guidance

The company said that disciplined management of the ingredients business will continue, with milk to be diverted to produce higher-margin products in the advanced nutrition and food service business.

It said that the performance of the advanced nutrition business will continue to build.

Synlait’s new multinational customers will start to lift margins and improve asset utilisation at Pokeno and Dunsandel.

The consumer business will deliver a steady contribution as it maintains growth but navigates high cheese commodity prices and continues to expand into overseas markets.

Operational cash flows will still be “robust” but “softer” than FY22.

Costs will increase modestly due to higher sales volumes, inflation and other factors.

A debt to EBITDA ratio between 2x to 2.5x is being targeted by the company.

The company said that it intends to enter FY24 with a similar level of profitability experienced before FY21. However, it’s managing several risks including the SAMR registration timeline for products for China, a tight labour market, high inflation and supply chain pressures.

Final thoughts

While Synlait is only back to where it was in August, the Synlait share price drop of around 8% is not a positive market vote of confidence. For owners of A2 Milk shares, I think it’s somewhat mixed. It’s good to see that profitability is improving, but higher costs from inflation isn’t helpful. I’m sure A2 would like to see the Synlait share price rise, not fall.

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