Are we breaking up?

COMPANY UPDATE

Need To Know

• A2M propose to cancel 'exclusivity' supply arrangement with Synlait Milk
• Synlait however dispute A2M's rights and ability to cancel the arrangement
• No actual changes to production, and no net material impact to A2M valuation

Investment Implications

A2M appears to be in a lover's row with Synlait Milk (SM1.AX - not covered) after Synlait failed to meet its delivery and on time performance for FY23, as referenced in a previous market announcement from A2M on 26 April 2023. Synlait currently has exclusive rights to the manufacturing and supply of A2M's platinum stages 1-3 product sold in China and ANZ and has been the majority supplier of A2M since inception.

The supply arrangement will not actually be impacted, as Synlait is still an important supplier, however the removal of exclusive rights would allow A2M to commence production at its Mataura Valley Milk facility, in-line with the company's strategic priority to make it profitable by FY26 or earlier.

Synlait have responded by disputing that A2M has the right to cancel any arrangement. It also notes that the current production supply agreement will continue on a rolling basis (with the same pricing and other key terms), requiring three years' notice of termination to the other party. Both companies have 20 days of 'good faith' dispute resolution before moving to arbitration if necessary. 

No financial details or trading update was provided, although Synlait noted it does not expect any impact on its FY23 or FY24 results. Synlait also holds the Chinese regulatory State Administration for Market Regulation (SAMR) license which is necessary for the China market label. The license expires in September 2027 and Synlait expects to maintain production for the period of that license.

Investment View

We don't view the announcement today as having any material impact on A2M. As with all couples, arguments will happen, and we see the potential for A2M to outgrow Synlait and move on. Whilst this won't be a complete breakup as Synlait will remain a key supplier for A2M, removing the exclusivity agreement could allow A2M to explore better commercial arrangements with either other external producers, or internally. The potential manufacturing at Mataura Valley could see it reach profitability earlier than management expects, however offset by the decline in value in A2M's holding of Synlait Milk stock. Our underlying thesis of A2M is therefore unchanged by the announcement and we retain our BUY recommendation.