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Centrale del Latte d’Italia — Sales improvement

Centrale del Latte d’Italia — Sales improvement

Centrale del Latte d’Italia’s (CLI) price increases, implemented during H1, continue to drive revenue growth, with total revenue of €187m in FY17 above our forecast of €181m. Newer initiatives, such as vegetable-based drinks and the export business continue to generate good growth. We have raised our revenue forecasts to reflect the higher FY17 base, but trim our EBITDA forecast as the FY17 figure was below our forecast. Now that the CLF business has been owned for a full year, revenue synergies are coming through and there has been scope for some cost efficiencies. We therefore raise our medium-term EBIT margin growth by 10bp per annum to capture the potential for further cost containment. Our fair value rises to €3.30/share (from €3.25 previously).

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Written by

Centrale del Latte d'Italia

Sales improvement

FY17 results

Food & beverages

19 March 2018

Price

€3.29

Market cap

€46m

Net debt (€m) at 31 December 2017

62.4

Shares in issue

14.0m

Free float

37%

Code

CLI

Primary exchange

STAR (Borsa Italiana)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.4)

(3.1)

13.4

Rel (local)

(2.6)

(5.8)

(0.4)

52-week high/low

€4.34

€2.78

Business description

Centrale del Latte d'Italia produces and distributes fresh and long-life milk (UHT and ESL) and dairy products such as cream, yoghurt and cheese. It has a leading position in milk in the Piedmont region of northern Italy and it has expanded to the Veneto, Liguria and Tuscany regions.

Next events

AGM

26 April 2018

Q118 results

10 May 2018

H118 results

02 August 2018

9M18 results

30 October 2018

Analysts

Sara Welford

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Centrale del Latte d'Italia is a research client of Edison Investment Research Limited

Centrale del Latte d’Italia’s (CLI) price increases, implemented during H1, continue to drive revenue growth, with total revenue of €187m in FY17 above our forecast of €181m. Newer initiatives, such as vegetable-based drinks and the export business continue to generate good growth. We have raised our revenue forecasts to reflect the higher FY17 base, but trim our EBITDA forecast as the FY17 figure was below our forecast. Now that the CLF business has been owned for a full year, revenue synergies are coming through and there has been scope for some cost efficiencies. We therefore raise our medium-term EBIT margin growth by 10bp per annum to capture the potential for further cost containment. Our fair value rises to €3.30/share (from €3.25 previously).

Year end

Total revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

119.8

(2.09)

(19.57)

6.00

N/A

1.8

12/17

187.5

(0.03)

(1.63)

6.00

N/A

1.8

12/18e

184.4

0.33

1.54

6.00

215.2

1.8

12/19e

186.2

1.36

6.30

6.00

52.6

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Price increases still driving revenue growth

Price increases were implemented on 1 April 2017 to offset some cost inflation and were fully rolled out on 1 June. We believe organic growth was c 6% for FY17, which is impressive. 2017 represents the first full year of ownership of the CLF business and indeed, FY17 EBITDA was affected by one-off costs of €220,000.

Raw material costs rising again

We note raw material costs started to increase again towards the end of FY17. We therefore trim our EBITDA forecast for FY18, which has a sequential effect on subsequent years. Given the level of gearing, the cut is more significant at the EPS level. We believe there is some scope for ongoing cost containment as a result of the merger with CLF: we note that labour costs were down 120bp as a percentage of revenues in FY17, as any retiring personnel are not being replaced. As a result of this, we also raise our medium-term EBIT margin growth to 10bp per annum (from 0bp). We leave our terminal EBIT margin assumption unchanged at 3%.

Valuation: Fair value of €3.30 per share

Our DCF model points to a fair value of €3.30 per share (from €3.25), implying that the stock is fairly valued. We calculate that for FY19e CLI now trades on a P/E of 52.6x and EV/EBITDA of 12.5x, with a dividend yield of 1.8%. The P/E is inflated in part due to the high interest costs as a result of the elevated level of debt in the short term associated with the merger by incorporation with CLF in September 2016. On EV/EBITDA, CLI trades at a premium of c 45% to our peer group of dairy processors.

FY17 results review

CLI’s total FY17 value of production (total revenue) of €187.5m compares to €119.8m in FY16. Net revenue/sales came in at €183.4m vs €117.8m in FY16. The majority of the growth was of course due to the merger with CLF. FY17 EBITDA of €7.2m (or €7.5m in underlying terms, as discussed above) compares with €2.9m in FY16, with margins up 150bp to 3.9%. Margin recovery was a feature in FY17 following the implementation of the price increases and also better cost control.

We note that vegetable drinks had a strong performance in FY17 as consumers continue to embrace vegetarian, vegan and generally low-fat diets, while consumers with lactose allergies or intolerances seek alternative products. Export sales also more than doubled, as CLI expanded the number of markets into which it exports and also introduced innovative sales channels.

The group successfully completed a €15m bond issue during the latter part of FY17, which allows it to diversify its sources of debt. We note the terms were attractive, with a 3.25% coupon.

Near-term estimates revisions

We raise our revenue forecasts to reflect the FY17 revenues coming in above our forecast. We trim our margin forecasts in light of milk farmgate prices continuing to increase. Our FY18 EBITDA forecast decreases to €7.8m (from €8.9m) and net income reduces to €0.22m from €0.52m. We illustrate the changes to our key forecasts in Exhibit 1.

Exhibit 1: Old vs new near-term forecasts

€000s

FY18e

FY19e

FY20e

Old

New

% change

Old

New

% change

Old

New

% change

Total revenue

181,903

184,364

1.4

182,812

186,208

1.9

183,726

188,070

2.4

EBITDA

8,852

7,834

(11.5)

9,261

8,285

(10.5)

9,675

8,744

(9.6)

PBT

804

331

(58.8)

1,815

1,356

(25.3)

2,215

1,763

(20.4)

Net income (reported)

523

215

(58.8)

1,180

882

(25.3)

1,439

1,146

(20.4)

EPS (reported), €

0.04

0.02

(58.8)

0.08

0.06

(25.3)

0.10

0.08

(20.4)

Source: Edison Investment Research

Valuation

CLI’s share price performance has been broadly in line with the FTSE MIB on a three-month and 12-month basis, although the share price has outperformed on a six-month basis following the announcement of the agreement with Alibaba. On 2019 estimates, CLI trades on a P/E of 52.6x and EV/EBITDA of 12.5x, with a dividend yield of 1.8%. The P/E is inflated due to the high level of debt following the merger, and hence the high interest costs.

On EV/EBITDA, CLI trades at a premium of c 45% to the average of our peer group of dairy processors, although we note that the companies in our peer group are much larger than CLI.

Exhibit 2: Benchmark valuation of CLI relative to peers

Market cap
(m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2018e

2019e

2018e

2019e

2018e

2019e

Parmalat

€156.6

17.8

N/A

9.6

N/A

1.7

N/A

Dairy Crest

€5,556.2

25.0

21.4

9.3

8.2

0.6

0.6

Dean Foods

£773.5

14.1

13.5

10.4

10.2

4.3

4.5

Saputo

$839.6

11.5

10.4

4.9

4.1

4.3

5.3

Peer group average

17.3

15.5

9.1

8.3

2.7

3.1

CLI

€46.3

215.2

52.6

13.2

12.5

1.8

1.8

Premium/(discount) to peer group (%)

1,146.7%

238.2%

45.2%

50.8%

(33.7%)

(40.6%)

Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 8 March 2018.

Our DCF is based on our (unchanged) assumptions of a 1.5% terminal growth rate and 3% terminal EBIT margin. Our WACC of 5.8% is based on an equity risk premium of 4.5%, a borrowing spread of 5% and beta of 0.9. Below, we show a sensitivity analysis to these assumptions and note that the current share price is discounting a terminal growth rate of 1.5% with a terminal EBIT margin of 3% (which compares to CLT’s pre-merger reported EBIT margin of 2.7% in 2014 and 1.6% in 2015).

Exhibit 3: DCF sensitivity (€/share) to terminal growth rate and EBIT margin

Terminal EBIT margin

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Terminal growth

0.0%

1.00

1.55

2.10

2.65

3.19

3.74

0.5%

1.21

1.82

2.42

3.02

3.63

4.23

1.0%

1.47

2.14

2.81

3.48

4.15

4.82

1.5%

1.79

2.54

3.30

4.04

4.79

5.54

2.0%

2.19

3.05

3.90

4.75

5.60

6.46

2.5%

2.72

3.70

4.69

5.67

6.66

7.65

3.0%

3.43

4.59

5.76

6.92

8.09

9.26

3.5%

4.44

5.86

7.29

8.71

10.13

11.56

4.0%

6.01

7.83

9.65

11.48

13.30

15.12

Source: Edison Investment Research


Exhibit 4: Financial summary

31-December

€'000s

2014

2015

2016

2017e

2018e

2019e

2020e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Total revenue (value of production)*

 

 

102,558

98,319

119,762

187,478

184,364

186,208

188,070

Cost of Sales

(82,415)

(78,796)

(98,652)

(153,937)

(150,287)

(151,604)

(152,932)

Gross Profit

20,143

19,523

21,110

33,541

34,077

34,604

35,138

EBITDA

 

 

5,845

4,851

2,905

7,245

7,834

8,285

8,744

Normalised operating profit

 

 

2,752

1,554

(1,254)

864

1,920

2,951

3,356

Amortisation of acquired intangibles

0

0

0

0

0

0

0

Exceptionals

(134)

145

(355)

(202)

0

0

0

Share-based payments

0

0

0

0

0

0

0

Reported operating profit

2,618

1,699

(1,609)

661

1,920

2,951

3,356

Net Interest

(811)

(678)

(692)

(996)

(1,696)

(1,701)

(1,700)

Joint ventures & associates (post tax)

(4)

(418)

(143)

107

107

107

107

Exceptionals

0

0

13,903

(81)

0

0

0

Profit Before Tax (norm)

 

 

1,937

458

(2,089)

(106)

331

1,356

1,763

Profit Before Tax (reported)

 

 

1,803

603

11,459

(309)

331

1,356

1,763

Reported tax

(1,012)

(87)

556

47

(116)

(475)

(617)

Profit After Tax (norm)

809

30

(2,153)

(310)

215

882

1,146

Profit After Tax (reported)

791

517

12,015

(261)

215

882

1,146

Minority interests

0

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

0

Net income (normalised)

809

30

(2,153)

(310)

215

882

1,146

Net income (reported)

791

517

12,015

(261)

215

882

1,146

Basic average number of shares outstanding (m)

10

10

11

14

14

14

14

EPS - basic normalised (€)

 

 

0.08

0.00

(0.20)

(0.02)

0.02

0.06

0.08

EPS - diluted normalised (€)

 

 

0.08

0.00

(0.20)

(0.02)

0.02

0.06

0.08

EPS - basic reported (€)

 

 

0.08

0.05

1.09

(0.02)

0.02

0.06

0.08

Dividend (€)

0.06

0.06

0.06

0.06

0.06

0.06

0.06

Revenue growth (%)

2.6

(4.1)

21.8

56.5

(1.7)

1.0

1.0

Gross Margin (%)

19.6

19.9

17.6

17.9

18.5

18.6

18.7

EBITDA Margin (%)

5.7

4.9

2.4

3.9

4.2

4.4

4.6

Normalised Operating Margin

2.7

1.6

-1.0

0.5

1.0

1.6

1.8

BALANCE SHEET

Fixed Assets

 

 

64,185

64,540

129,773

132,731

132,717

132,969

133,224

Intangible Assets

11,706

11,539

19,484

19,521

19,507

19,493

19,479

Tangible Assets

51,671

52,010

107,335

110,817

110,817

111,083

111,352

Investments & other

808

992

2,954

2,393

2,393

2,393

2,393

Current Assets

 

 

36,689

41,122

60,457

78,611

73,102

73,297

73,758

Stocks

3,438

3,541

7,698

9,114

8,898

8,976

9,055

Debtors

15,720

14,370

28,209

31,449

31,606

31,922

32,241

Cash & cash equivalents

10,051

12,192

9,521

25,475

20,024

19,825

19,888

Other

7,481

11,019

15,030

12,573

12,573

12,573

12,573

Current Liabilities

 

 

(33,232)

(35,004)

(68,199)

(77,372)

(77,437)

(77,842)

(78,251)

Creditors

(23,744)

(24,247)

(42,910)

(46,223)

(46,288)

(46,694)

(47,103)

Tax and social security

(468)

(357)

(697)

(914)

(914)

(914)

(914)

Short term borrowings

(9,021)

(10,401)

(24,592)

(30,234)

(30,234)

(30,234)

(30,234)

Other

0

0

0

0

0

0

0

Long-term Liabilities

 

 

(27,178)

(29,847)

(58,489)

(70,874)

(65,910)

(65,910)

(65,910)

Long-term borrowings

(18,219)

(22,446)

(45,159)

(57,624)

(57,624)

(57,624)

(57,624)

Other long term liabilities

(8,960)

(7,402)

(13,330)

(13,250)

(8,286)

(8,286)

(8,286)

Net Assets

 

 

40,464

40,810

63,542

63,097

62,472

62,514

62,820

Minority interests

0

0

0

0

0

0

0

Shareholders' equity

 

 

40,464

40,810

63,542

63,097

62,472

62,514

62,820

CASH FLOW

Op Cash Flow before WC and tax

5,845

4,851

2,905

7,245

7,834

8,285

8,744

Working capital

1,811

(1,942)

(30)

1,547

124

12

11

Exceptional & other

(129)

(1,262)

(15,092)

(359)

107

107

107

Tax

(1,012)

(87)

556

47

(116)

(475)

(617)

Net operating cash flow

 

 

6,515

1,560

(11,661)

8,480

7,949

7,928

8,245

Capex

(2,107)

(3,914)

(4,095)

(9,849)

(5,900)

(5,586)

(5,642)

Acquisitions/disposals

0

0

0

0

0

0

0

Net interest

(811)

(678)

(692)

(996)

(1,696)

(1,701)

(1,700)

Equity financing

0

0

0

0

0

0

0

Dividends

(600)

(600)

(600)

0

(840)

(840)

(840)

Other

2,293

5,031

(1,131)

21,436

0

0

0

Net Cash Flow

5,291

1,399

(18,178)

19,071

(487)

(199)

63

Opening net debt/(cash)

 

 

19,950

17,189

20,654

60,230

62,383

67,833

68,032

FX

0

0

0

0

0

0

0

Other non-cash movements

(2,529)

(4,865)

(21,397)

(21,224)

(4,964)

0

0

Closing net debt/(cash)

 

 

17,189

20,654

60,230

62,383

67,833

68,032

67,969

Source: Edison Investment Research, company accounts. *Note: Total revenue as defined by the company: revenue from sales and services plus changes in inventories and other revenue and income.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Centrale del Latte d'Italia and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. 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Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Rockhopper Exploration — Operator confident in 2018 Sea Lion Phase 1 FID

Premier Oil’s (PMO’s) FY17 results highlighted progress made by the Sea Lion project operator in securing vendor/debt financing, a key hurdle ahead of the final investment decision (FID). Premier’s proposed financing structure proposes a combination of vendor finance ($375m), senior debt ($750m) and equity ($375m) to fund the $1.5bn gross capex bill ahead of first oil. We had previously heavily risked Sea Lion Phase 1, given perceived uncertainty over Premier’s commitment to the project. We believe deleveraging of Premier’s balance sheet, the materiality of Sea Lion in the context of Premier’s development portfolio and progress made with regard to project finance significantly increase our confidence in the project reaching FID. We risk Sea Lion Phase 1 at a 40% chance of success (up from 20%), increasing our valuation of Rockhopper (RKH) from 44.2p/share to 62.9p/share (+42%).

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