Steady performance in a tough environment

Centrale del Latte d'Italia 21 March 2019 Update
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Centrale del Latte d’Italia

Steady performance in a tough environment

FY18 results

Food & beverages

21 March 2019

Price

€2.80

Market cap

€39m

Net debt (€m) at 31 December 2018

73.8

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

1.5

3.0

(15.0)

Rel (local)

(4.0)

(9.0)

(9.8)

52-week high/low

€3.40

€2.64

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

30 April

Q119 results

14 May

H119 results

12 September

9m 2019 results

13 November

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 (CLI) had a good year in FY18, with total revenue up 1.2% and EBITDA margins up 40bp. The economic and consumer environment in Italy remains challenging. The export business continues to be a standout performer, albeit relatively small. We leave our underlying forecasts unchanged and our fair value remains €3.35 per share.

Year end

Total revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

182.2

(0.03)

(1.63)

0.00

N/A

N/A

12/18

183.1

(0.13)

(1.91)

0.00

N/A

N/A

12/19e

182.1

1.53

7.11

0.00

39.4

N/A

12/20e

183.9

1.96

9.08

0.00

30.8

N/A

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

Performance continues to be mixed

Fresh milk performed very well in H118 but took a sudden turn during Q3 as overall consumption in the market declined. Despite management actions in the form of marketing initiatives to mitigate the problems, the downward trend continued in Q4. Conversely, UHT milk had a tricky initial nine months of the year but recovered in Q4. The yogurt segment also saw an improved performance as tough competition eased off. Overall, CLI’s Q4 turnover was up 1.2%, in line with the FY18 performance, despite the challenging consumer and economic environment across the entire food and beverage space.

Export and vegetable drinks growing rapidly

The prepared salads segment bounced back during Q4. The prepared salads plant was sold in exchange for a distribution agreement with Zerbinati, effective as of 1 September, which is starting to bear fruit. Bulk milk and cream is a by-product of dairy processing and is mostly influenced by seasonal supply and demand, but was up in the quarter. The export business continued to grow, albeit from a low base, and accounted for c 2% of turnover for the year. Vegetable-based drinks also continued to witness strong growth thanks to increased consumer demand for dairy alternatives. The division’s turnover grew 8.8% in FY18.

Valuation: Fair value of €3.35 per share

Our DCF model points to a fair value of €3.35 per share (unchanged), implying c 20% upside. We calculate that for FY19e, CLI now trades on a P/E of 39.4x and EV/EBITDA of 12.0x. On FY19e EV/EBITDA, CLI trades at a premium of c 10% to our peer group of dairy processors.

FY18 results review

CLI’s total FY18 value of production (total revenue) of €183.1m compares to €182.2m in FY17. Net revenue/sales came in at €180.3m vs €178.2m in FY17. FY18 EBITDA of €7.7m compares with €7.2m in FY17, with margins up 40bp to 4.3%. Margin recovery was a feature in both FY17 and FY18 after the implementation of price increases and better cost control.

We note that vegetable drinks remained on a growth trajectory through FY18 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 introduced innovative sales channels, such as its first Chinese virtual flagship store on Tmall, Alibaba’s largest B2C e-commerce platform.

Management changes

The board has announced two nominations:

Edoardo Pozzoli (aged 36), current corporate director, is nominated to the new position of director general to smooth the transition to the younger generation of family ownership.

Giuseppe Bodrero (aged 50) is nominated CFO and investor relations officer, with effect from 15 April 2019. He was previously CFO of Gruppo Caffarel (Italia), a division of Lindt. Incumbent CFO Vittorio Vaudagnotti will retire from the company.

Near-term estimate revisions

We leave our underlying forecasts unchanged. We trim our revenue forecasts: the adoption of IFRS 15 has caused the base to fall, but our underlying growth assumption remains unchanged at +1% for FY19 and FY20. We see upside to our forecast, given the positive momentum in the export business and the opening of new online and mobile channels during Q418. Our FY19 EBITDA forecast decreases to €8.5m (from €8.8m) but our underlying gross margin change remains +10bp. Due to the leverage in the business, the cut to PBT is more significant. We illustrate the changes to our key forecasts in Exhibit 1.

Exhibit 1: Old vs new near-term forecasts

2019e

2020e

€000s

Old

New

% change

Old

New

% change

Revenue

186,208

182,128

(2.2)

188,070

183,950

(2.2)

EBITDA

8,750

8,453

(3.4)

9,214

8,906

(3.3)

PBT

1,875

1,531

(18.3)

2,311

1,955

(15.4)

Net income (reported)

1,219

995

(18.4)

1,502

1,271

(15.4)

EPS (reported), €

0.09

0.07

(21.0)

0.11

0.09

(17.5)

Source: Edison Investment Research

Valuation

On 2020 estimates, CLI trades on a P/E of 30.8x and EV/EBITDA of 11.4x. The peer group average P/E is inflated by Dean Foods’ high figure and we note CLI trades at a premium to its other dairy peers, due to its high level of debt following the merger.

On FY19e EV/EBITDA, CLI trades at a premium of c 12% 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 (%)

2019e

2020e

2019e

2020e

2019e

2020e

Valsoia

€151.0

21.2

N/A

11.7

N/A

2.3

N/A

Dairy Crest

£983.7

17.9

16.9

13.2

12.5

3.6

3.7

Dean Foods

$274

-10.2

52.7

7.1

5.3

0.8

0.8

Saputo

$17,249

26.7

22.1

N/A

N/A

1.5

1.6

Peer group average

13.9

30.6

10.7

8.9

2.1

2.0

CLI

€39.2

39.4

30.8

12.0

11.4

0.0

0.0

Premium/(discount) to peer group (%)

183.1%

0.9%

12.5%

28.2%

N/A

N/A

Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 15 March 2019.

Our DCF is based on our (unchanged) assumptions of a 1.5% terminal growth rate and 3% terminal EBIT margin. Our WACC of 5.9% 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 the current share price is discounting a terminal growth rate of 1.5% with a terminal EBIT margin of 2.6% (which compares to Centrale del Latte di Torino’s pre-merger reported EBIT margin of 2.7% in 2014 and 1.6% in 2015, and CLI’s reported margin of 0.6% for 2018).

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%

1.16

1.68

2.21

2.74

3.27

3.79

0.5%

1.36

1.94

2.52

3.09

3.67

4.25

1.0%

1.60

2.24

2.88

3.52

4.16

4.80

1.5%

1.90

2.62

3.35

4.05

4.76

5.48

2.0%

2.27

3.08

3.90

4.71

5.52

6.33

2.5%

2.76

3.69

4.62

5.56

6.49

7.43

3.0%

3.40

4.50

5.60

6.70

7.80

8.90

3.5%

4.32

5.65

6.98

8.31

9.64

10.97

4.0%

5.70

7.39

9.07

10.75

12.44

14.12

Source: Edison Investment Research

Exhibit 4: Financial summary

€000s

2015

2016

2017

2018

2019e

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

98,319

119,762

182,183

183,138

182,128

183,950

185,789

Cost of Sales

(78,796)

(98,652)

(148,642)

(148,894)

(147,360)

(148,649)

(149,950)

Gross Profit

19,523

21,110

33,541

34,244

34,768

35,300

35,839

EBITDA

 

 

4,851

2,905

7,245

7,739

8,453

8,906

9,367

Normalised operating profit

 

 

1,554

(1,254)

864

1,128

3,233

3,633

4,041

Amortisation of acquired intangibles

0

0

0

0

0

0

0

Exceptionals

145

(355)

(202)

(279)

0

0

0

Share-based payments

0

0

0

0

0

0

0

Reported operating profit

1,699

(1,609)

661

849

3,233

3,633

4,041

Net Interest

(678)

(692)

(996)

(1,327)

(1,776)

(1,752)

(1,722)

Joint ventures & associates (post tax)

(418)

(143)

107

74

74

74

74

Exceptionals

0

13,903

(81)

0

0

0

0

Profit Before Tax (norm)

 

 

458

(2,089)

(25)

(125)

1,531

1,955

2,394

Profit Before Tax (reported)

 

 

603

11,459

(309)

(404)

1,531

1,955

2,394

Reported tax

(87)

556

47

803

(536)

(684)

(838)

Profit After Tax (norm)

30

(2,153)

(229)

(267)

995

1,271

1,556

Profit After Tax (reported)

517

12,015

(261)

398

995

1,271

1,556

Minority interests

0

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

0

Net income (normalised)

30

(2,153)

(229)

(267)

995

1,271

1,556

Net income (reported)

517

12,015

(261)

398

995

1,271

1,556

Basic average number of shares outstanding (m)

10

11

14

14

14

14

14

EPS - basic normalised (€)

 

 

0.00

(0.20)

(0.02)

(0.02)

0.07

0.09

0.11

EPS - diluted normalised (€)

 

 

0.00

(0.20)

(0.02)

(0.02)

0.07

0.09

0.11

EPS - basic reported (€)

 

 

0.05

1.09

(0.02)

0.03

0.07

0.09

0.11

Dividend (€)

0.06

0.06

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(4.1)

21.8

52.1

0.5

(0.6)

1.0

1.0

Gross Margin (%)

19.9

17.6

18.4

18.7

19.1

19.2

19.3

EBITDA Margin (%)

4.9

2.4

4.0

4.2

4.6

4.8

5.0

Normalised Operating Margin

1.6

(1.0)

0.5

0.6

1.8

2.0

2.2

BALANCE SHEET

Fixed Assets

 

 

64,540

129,773

132,731

142,807

143,050

143,296

143,545

Intangible Assets

11,539

19,484

19,521

19,644

19,627

19,610

19,593

Tangible Assets

52,010

107,335

110,817

120,434

120,694

120,957

121,222

Investments & other

992

2,954

2,393

2,730

2,730

2,730

2,730

Current Assets

 

 

41,122

60,457

78,611

67,468

67,743

69,168

70,880

Stocks

3,541

7,698

9,114

9,971

9,869

9,955

10,042

Debtors

14,370

28,209

31,449

30,114

30,415

30,719

31,026

Cash & cash equivalents

12,192

9,521

25,475

13,028

9,604

10,640

11,957

Other

11,019

15,030

12,573

14,355

17,855

17,855

17,855

Current Liabilities

 

 

(35,004)

(68,199)

(77,372)

(67,870)

(67,393)

(67,794)

(68,198)

Creditors

(24,247)

(42,910)

(46,223)

(46,275)

(45,798)

(46,199)

(46,603)

Tax and social security

(357)

(697)

(914)

(964)

(964)

(964)

(964)

Short term borrowings

(10,401)

(24,592)

(30,234)

(20,631)

(20,631)

(20,631)

(20,631)

Other

0

0

0

0

0

0

0

Long Term Liabilities

 

 

(29,847)

(58,489)

(70,874)

(78,683)

(78,683)

(78,683)

(78,683)

Long term borrowings

(22,446)

(45,159)

(57,624)

(66,195)

(66,195)

(66,195)

(66,195)

Other long term liabilities

(7,402)

(13,330)

(13,250)

(12,487)

(12,487)

(12,487)

(12,487)

Net Assets

 

 

40,810

63,542

63,097

63,722

64,718

65,988

67,544

Minority interests

0

0

0

0

0

0

0

Shareholders' equity

 

 

40,810

63,542

63,097

63,722

64,718

65,988

67,544

CASH FLOW

Op Cash Flow before WC and tax

4,851

2,905

7,245

7,739

8,453

8,906

9,367

Working capital

(1,942)

(30)

1,547

(1,438)

(675)

10

10

Exceptional & other

(1,262)

(15,092)

(359)

(840)

74

74

74

Tax

(87)

556

47

803

(536)

(684)

(838)

Net operating cash flow

 

 

1,560

(11,661)

8,480

6,264

7,316

8,306

8,613

Capex

(3,914)

(4,095)

(9,849)

(16,210)

(5,464)

(5,518)

(5,574)

Acquisitions/disposals

0

0

0

(1)

0

0

0

Net interest

(678)

(692)

(996)

(1,327)

(1,776)

(1,752)

(1,722)

Equity financing

0

0

0

0

0

0

0

Dividends

(600)

(600)

0

0

0

0

0

Other

5,031

(1,131)

21,437

291

0

0

0

Net Cash Flow

1,399

(18,178)

19,072

(10,984)

77

1,035

1,317

Opening net debt/(cash)

 

 

17,189

20,654

60,230

62,383

73,798

77,222

76,186

FX

0

0

0

0

0

0

0

Other non-cash movements

(4,865)

(21,397)

(21,225)

(432)

(3,500)

0

0

Closing net debt/(cash)

 

 

20,654

60,230

62,383

73,798

77,222

76,186

74,869

Source: Edison Investment Research, company data

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This report has been commissioned by Centrale del Latte d'Italia and prepared and issued by Edison, in consideration of a fee payable by Centrale del Latte d'Italia. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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New York +1 646 653 7026

1,185 Avenue of the Americas

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Level 4, Office 1205

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General disclaimer and copyright

This report has been commissioned by Centrale del Latte d'Italia and prepared and issued by Edison, in consideration of a fee payable by Centrale del Latte d'Italia. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Australia

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New Zealand

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. 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 (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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