Investors in Synlait Milk Limited (NZSE:SML) had a good week, as its shares rose 8.5% to close at NZ$5.10 following the release of its half-yearly results. Results were mixed, with revenues of NZ$559m exceeding expectations, even as earnings per share (EPS) came up short. Statutory earnings were NZ$0.46 per share, -5.8% below whatthe analysts had forecast. Following the result, the analysts have updated their earnings model, and it would be good to know whether they think there's been a strong change in the company's prospects, or if it's business as usual. We thought readers would find it interesting to see the analysts latest (statutory) post-earnings forecasts for next year.
Taking into account the latest results, the consensus forecast from Synlait Milk's nine analysts is for revenues of NZ$1.24b in 2020, which would reflect a solid 11% improvement in sales compared to the last 12 months. Statutory earnings per share are predicted to climb 10% to NZ$0.44. Before this earnings report, the analysts had been forecasting revenues of NZ$1.24b and earnings per share (EPS) of NZ$0.45 in 2020. So it looks like there's been a small decline in overall sentiment after the recent results - there's been no major change to revenue estimates, but the analysts did make a minor downgrade to their earnings per share forecasts.
It might be a surprise to learn that the consensus price target fell 12% to NZ$6.65, with the analysts clearly linking lower forecast earnings to the performance of the stock price. There's another way to think about price targets though, and that's to look at the range of price targets put forward by analysts, because a wide range of estimates could suggest a diverse view on possible outcomes for the business. The most optimistic Synlait Milk analyst has a price target of NZ$7.70 per share, while the most pessimistic values it at NZ$5.65. There are definitely some different views on the stock, but the range of estimates is not wide enough as to imply that the situation is unforecastable, in our view.
Of course, another way to look at these forecasts is to place them into context against the industry itself. We would highlight that Synlait Milk's revenue growth is expected to slow, with forecast 11% increase next year well below the historical 19%p.a. growth over the last five years. Juxtapose this against the other companies in the industry with analyst coverage, which are forecast to grow their revenues (in aggregate) 14% next year. So it's pretty clear that, while Synlait Milk's revenue growth is expected to slow, it's expected to grow roughly in line with the industry.
The Bottom Line
The most important thing to take away is that the analysts downgraded their earnings per share estimates, showing that there has been a clear decline in sentiment following these results. Happily, there were no real changes to sales forecasts, with the business still expected to grow in line with the overall industry. Furthermore, the analysts also cut their price targets, suggesting that the latest news has led to greater pessimism about the intrinsic value of the business.
Following on from that line of thought, we think that the long-term prospects of the business are much more relevant than next year's earnings. We have estimates - from multiple Synlait Milk analysts - going out to 2022, and you can see them free on our platform here.
We don't want to rain on the parade too much, but we did also find 3 warning signs for Synlait Milk (1 is significant!) that you need to be mindful of.
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