Taking Stock 6 February 2025
THE recovery of Synlait Milk is a credit to those who restructured its capital base and is of some small benefit to those who ignored the somewhat infantile earlier signals from the market and the media.
Synlait last week enjoyed a 20% share price rise after its new board advised that the company would return to profitability.
It also advised that the farmers who supply Synlait were to receive a bonus price. Many suppliers were now recommitting to retain their supply agreement, Synlait announced.
What a wonderful turnaround from the bleak market pricing and media coverage from just a few months ago.
My view is that the market and media never seemed to see the inevitable solutions that were available to a company with a real business.
Synlait Milk had real assets with a genuine value greater than its debt and a license to export to China that had a lasting value. It had some useless board members and had made the sort of goofy errors that others like Fletcher Building had made. It almost ruined the promising business case that its founder John Penno had envisaged.
When its board kept making amateurish errors its banking syndicate naturally reacted, threatening to reject a renewal of the loan facility, which in turn would have led to receivership and possibly liquidation, a disastrous prospect. But it was never likely. Synlait was a genuine business.
We all know receivers and liquidators rarely achieve real prices at asset sales they organise.
The outcome of a liquidation would likely have led to the two major shareholders, Bright Dairy (China) and a2 Milk (NZ), battling to see who could pay the least to buy back valuable assets from the liquidator.
That would have been a dreadful outcome for shareholders and, though it was unlikely, might have led to a shortfall available to the subordinated bondholders, who ranked ahead of the shareholders, but behind the banks.
The seminars we held around New Zealand last year clearly expressed the view that Synlait Milk’s business was real, that its balance sheet needed fixing, but that the bonds would not fail, and that the future for Bright and ATM would be defined by the support provided to Synlait. The two shareholders simply had to accept the need for more capital.
The market pricing of the bonds at the time was less than half the promised repayment value, and the shares were priced as though there was no value in the company.
That response of the “market” did not signal maturity or wisdom.
Synlait Milk’s new chairman, George Adams, put in the work, endured all the negotiations between shareholders, and is now dancing with delight, having presided over a successful recovery plan and the excising of some boardroom deadwood.
As an aside, why do directors with no history of value-add somehow retain the confidence of the major shareholders?
Synlait is now restoring its relationships with the farmers, its banks, its few remaining shareholders and, most of all, the market for its products.
There is a major caveat, however.
My expectation is that the rescuers (Bright and ATM) will get ALL of the rewards.
The heavily-diluted remaining shareholders will receive nicely written annual reports but will receive minimal if any of the surplus income. I believe Synlait should be de-listed, maybe by a takeover bid, at a modest price before any recovery has been established.
I expect Bright and ATM will exercise their right to price their contributions to Synlait Milk at a level that results in any “surplus”, any time soon, producing even a coin of dividend for the diluted minority shareholders.
Having rescued Synlait, Bright and ATM rightly occupy all the seats in the cockpit.
Accordingly, given my personal attitude to risk, I would prefer it if my portfolio included Fonterra rather than Synlait Milk.
I did not always have that opinion.
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ONE of New Zealand’s smartest companies, Infratil, has been a short-term victim of Trump’s edicts.
The US President has included renewable energy in his definition of “wokeness” and has started to dismantle programmes that support “green” energy, including offshore wind farms.
Infratil has made large financial and philosophical commitments to renewable energy in the USA, signalling that, in particular, coal is not a desired source of energy.
Trump is promoting the use of American coal and is undermining “woke” solutions like wind and solar. His trumpeting is annoying Infratil, not to speak of those who believe it is their job to rescue the planet from carbonisation.
Infratil has also committed to energy generation for artificial intelligence (AI) computing needs, building more data centres.
Of course last week China displayed an ability to develop AI without excess energy requirements.
Nvidia, the US giant which makes the tiny super-chips needed by AI computing, was immediately re-priced by fund managers, falling 17% from its grossly exaggerated share price height. In so doing, it sliced many billions from the value of the NZ Government’s Superannuation Fund, whose biggest single investment is Nvidia.
The same fund has a huge investment in Infratil, so a further sum was devalued when Infratil’s share price fell by around 7%.
The intervention that, at least for now, damaged these share prices was not really Trump, who at most will preside for only four more years, in his idiosyncratic, some would say idiotic, manner.
The real news was that Chinese competition has surfaced.
Our chairman-elect, James Lee, wrote in Taking Stock before Christmas that some ballooning US technology share prices appeared to overlook the certainty of imminent competition that would bring reality to expectations about future profits and share price values.
In time James will discuss this in his own words, but in essence he was noting the inevitability of competition for the likes of Nvidia. His words were timely, if not prophetic.
Markets had been pricing America’s technology stocks as though their advancement was linear and would inevitably lead to perpetual financial successes.
James’ global network after a stint as CEO of NZ’s best investment bank has ensured he has a fairly handy base from which to understand asset mis-pricing by those often investing other people’s money. His warning of the inevitability of competition to reduce margins and market share, thus leading to more realism in share pricing, came just a few weeks before the Nvidia price had to be recalibrated.
He will write Taking Stock for next week. His perspective should remain on clients’ reading list.
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IF ANY future government is to sell a state asset, the asset I would most wish to buy would be the credit collection function of the Inland Revenue Department.
Heaven knows it needs a private influence to put an end to its remarkably complacent attitude towards collecting money from its debtors.
I will revert to this theme later in this item but let me begin by illustrating a crucial truism.
As a schoolboy, my obsession for sport led to holiday jobs as a greenkeeping worker at an eminent golf club. I worked in a team of two, cleaning up messy areas, including a bunch of fallen trees in which existed a million wasps that I disturbed. That is another story that ended in a bath of vinegar.
Anyway, my workmate was a terrific golfer but a crazy gambler. He died at a young age, having wasted his talent, but that is also another story.
He told me many stories of his gambling successes, one being of an occasion in the 1960s when he was asked by an elderly neighbour to take on course a sum of 30 pounds, and to place all of it on one horse in the first leg of an on-course double.
In those days, he would have received on her behalf 30 tickets, to spend across the second leg of the double, if his neighbour’s pick won the first leg.
It did. It paid around 25 pounds to win.
She had instructed him to use the 30 tickets to put two pounds on each and every one of the 15 runners in the second leg. She would then be certain of receiving a handsome collect.
My workmate by the time the second leg was scheduled had lost all of his money.
He looked at the second leg starters and decided not to put two pounds on each of some of 15 runners, but to put three pounds on the 10 horses he felt had a chance to win and thus use her tickets to fill his pockets.
With 100 yards to run none of his ten choices were in front but on the line one of the ten succeeded, at long odds, so the double (of about 300 pounds) was collected three times, two for his neighbour, one for himself.
He rejoiced in telling the story.
I asked him how what he had done was not theft? Even a teenage schoolboy could see that. What would he have done if none of his ten picks won? He rarely had enough money to pay for his own 7oz Red Band.
How would he pay her the money she was due? What was his solution?
Fly to Brisbane the next day, was his reply.
This long story is to illustrate the dishonesty of using other people’s money illegally, and the fallacy of believing that, because, after use, by giving the real owner the money due, dishonesty was somehow reversed or forgiven.
This is where the Inland Revenue Department is relevant.
In recent months the IRD has been the cause of nearly 75% of all liquidations and receiverships in that period.
The IRD has got angry about businesses that do not pass on to the IRD the GST, the PAYE and/or the staff KiwiSaver contributions that the business had collected on behalf of the IRD.
Instead, many businesses have used these monies for their own purposes, paying creditors, buying stock, paying wages, paying dividends, paying bonuses or lending to shareholders/owners, maybe to buy toys.
Businesses are contracted by IRD to collect GST at the rate of 15% on virtually all products or services, and to pay all GST collected to the IRD on defined dates.
The money at NO stage belongs to the business, or its owners. The money is held IN TRUST on behalf of the IRD, in effect.
Similar obligations apply to PAYE tax and to KiwiSaver contributions.
Not to pay on a due date to the IRD is a default and must, indeed should, incur penalties.
I ask the question; what would a private business do that was owed money on a defined date, and was not paid? We know what the IRD does. It adds on penalty interest and years later calls in a liquidator.
I know what I would do if I bought the right to be its tax collector.
I would contact the client, point out the error, and agree to an immediate remedy, such as payment tomorrow AND would monitor the remedy, reacting strongly if the new commitment was not met. More delays would be intolerable.
A private business owner would not succeed in building his business if he did not respond in this way. Within a week, I would be calling or visiting the failed business every day and unless it adhered to its catch-up promises, I would be invoking my legal rights.
Most of us would call this “credit control”.
So here is my point.
In recent liquidations, apparently most of which were prompted by the IRD, countless bars, cafes, restaurants, retailers, property developers, and used car lots have been put into some sort of administration.
Almost every time the IRD was a major creditor, often owed millions or hundreds of thousands by small businesses who defaulted on GST, PAYE or KiwiSaver contributions for months or years.
How could this be? Surely after just one missed payment the IRD would behave like a business owner and would act brutally to any example of misuse (theft) of money held on its behalf.
We now read of how “unreasonable” it is of the IRD not to “settle” by “forgiving” some of the debt used. What piffle. Without some other agreement in place, trading on with the IRD as “the bank” is theft.
The obvious question to ask is why theft is not reported within days unless an agreed restoration is promised, monitored and executed?
The IRD needs a new mentality. It has the means to stop itself being robbed while the debtor uses cash flow as though all of it was its own, to use as it pleases.
Theft, in my opinion, should lead to jail, to public disgrace, and to being banned from the privilege of obtaining credit from others, or running any limited liability company.
Does the IRD need to contract to the private sector the duty of collecting its dues? By the evidence currently available a large new listed company would make impressive revenues by introducing private sector disciplines to the IRD collection process.
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Travel
Christchurch – 13 February – Fraser Hunter
Lower Hutt – 20 February – Fraser Hunter
Blenheim – 20 February – Edward Lee
Nelson – 21 February – Edward Lee
Dargaville – 26 February – David Colman
Kerikeri – 27 February – David Colman
Wairarapa – 28 February – Fraser Hunter
Whangarei – 28 February – David Colman
Napier - Mission Estate - 6 March - Edward LeeNapier - Havelock North - 7 March - Edward Lee
Please contact us if you would like to make an appointment to see any of our advisers.
(I will publish my planned travel dates as soon as I am clear to do so)
Chris Lee
Chris Lee & Partners Ltd
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