Centrale del Latte d'Italia |
Steady progress |
H118 results |
Food & beverages |
6 August 2018 |
Share price performance
Business description
Next events
Analysts
|
Despite the continued challenging consumer environment in Italy and across Western Europe during H118, Centrale del Latte d’Italia’s (CLI’s) business continued to perform well, in part due to the price increases implemented during Q217. Vegetable-based drinks and the export business remained stand-out performers, albeit from a low base, and fresh milk also performed well. We leave our FY18 revenue forecasts unchanged, but we adjust our estimates for the sale of the prepared salads plant. Our EBITDA forecast increases as labour costs are reduced thanks to the new agreement and our fair value nudges up to €3.35 per share (from €3.30).
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 |
2.0 |
12/17 |
187.5 |
(0.03) |
(1.63) |
0.00 |
N/A |
N/A |
12/18e |
184.4 |
0.55 |
2.54 |
4.29 |
116.5 |
1.4 |
12/19e |
186.2 |
1.87 |
8.71 |
4.29 |
34.0 |
1.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Fresh milk performed very well, whereas UHT milk continued to decline as strong promotional activity by the competition remained a feature. The yogurt segment continued to suffer from tough competition and the prepared salads segment remained affected by the weak economic backdrop, which had an impact on consumption. Bulk milk and cream is a by-product of dairy processing and is mostly influenced by seasonal supply and demand. Other prepared products continued to perform well. Price increases implemented across the business in H117 have partly driven revenue growth over the past 12 months and we will see the effects of this subside as we cycle a full year of these prices increases.
In June, the company announced it had reached a deal with Zerbinati, an Italian producer of chilled prepared meals such as fresh soups and gluten-free burgers: CLI is selling its prepared salads plant in Casteggio in exchange for a distribution agreement whereby CLI will distribute Zerbinati’s products in the regions where it operates. We believe the plant was loss making. At present we leave our sales forecasts unchanged as it will take time to leverage the increased product offering, but our labour costs fall. This results in a 2% and 6% increase in EBITDA for 2018 and 2019 respectively.
Our DCF model points to a fair value of €3.35 per share (previously €3.30), implying 16% upside. We calculate that for FY19e CLI now trades on a P/E of 34.0x and EV/EBITDA of 12.8x. On EV/EBITDA, CLI trades at a premium of c 55% to our peer group of dairy processors.
The consumer environment continued to be extremely tough in Q2 following a difficult Q1. The economic and political climate remained uncertain in Italy following the general election and the length of time it took to install a new government, and consumer confidence was lower across Western Europe.
The fresh milk business continued to recover, whereas the UHT milk business remained under pressure due to strong promotional activity by CLI’s much larger competitors. The yoghurt business also had a tough H1 as CLI’s business suffered from increased promotional activity by the competition, which caused a loss of volume and market share. Yoghurt accounted for 5% of sales in FY17 so the size of the business is relatively small.
CLI’s total H118 value of production (total revenue) of €91.8m compares to €90.2m in H117. Net revenue/sales came in at €90.5m vs €88.0m in H117. H118 EBITDA of €3.4m is a significant improvement versus €2.5m in H117. H1 gross margins were up (18.6% vs 17.6% in H117), mainly driven by the price increases implemented during Q217. EBITDA margins were up 90bp to 3.7% in H118. We leave our underlying forecasts unchanged: during H2 we expect comparatives to become tougher as we start to cycle the price increases implemented during 2017. Our actual EBITDA forecasts move up due to the prepared salads transaction (see below).
CLI is selling its prepared salads plant in Casteggio in exchange for a distribution agreement whereby CLI will distribute Zerbinati’s products in the regions where it operates. Although the deal was announced in June, it will be effective from 1 September 2018.
As discussed above, we leave our sales forecasts unchanged as it will take time for the benefits of the increased product offering to come through for CLI. Labour costs, however, will fall immediately, as the 26 employees in the Casteggio plant are transferred to Zerbinati ownership. We adjust our FY18 and FY19 estimates accordingly. In addition, raw material costs may also benefit due to Zerbinati’s greater scale and hence a lower purchase price for CLI, although we await further details before adjusting our estimates for this.
We illustrate the changes to our forecasts below.
Exhibit 1: Forecast changes
€000s |
FY18e |
FY19e |
FY20e |
||||||
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
|
Total revenue |
184,364 |
184,364 |
0.0 |
186,208 |
186,208 |
0.0 |
188,070 |
188,070 |
0.0 |
EBITDA |
7,834 |
8,018 |
2.4 |
8,285 |
8,750 |
5.6 |
8,744 |
9,214 |
5.4 |
PBT |
353 |
547 |
55.0 |
1,384 |
1,875 |
35.4 |
1,798 |
2,311 |
28.5 |
Net income (reported) |
229 |
355 |
55.0 |
900 |
1,219 |
35.4 |
1,169 |
1,502 |
28.5 |
EPS (reported) (€) |
0.02 |
0.03 |
55.0 |
0.06 |
0.09 |
35.4 |
0.08 |
0.11 |
28.5 |
Source: Edison Investment Research |
CLI’s share price performance has performed broadly in line with the FTSE MIB on a three-month basis; it has underperformed on a six-month basis and outperformed on a 12-month basis. On 2019 estimates, CLI trades on a P/E of 34.0x and EV/EBITDA of 12.8x.
On EV/EBITDA, CLI trades at a premium of c 55% to the average of our peer group of dairy processors; 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 |
€5,277.9 |
22.8 |
21.1 |
7.7 |
7.2 |
0.7 |
0.4 |
Dairy Crest |
£757.7 |
13.0 |
12.1 |
9.6 |
9.1 |
4.9 |
5.0 |
Dean Foods |
$876.0 |
12.3 |
11.8 |
5.4 |
5.1 |
4.0 |
4.5 |
Saputo |
$16,679.7 |
19.2 |
N/A |
11.9 |
N/A |
1.6 |
N/A |
Peer group average |
16.8 |
15.0 |
8.6 |
7.2 |
2.8 |
3.3 |
|
CLI |
€40.3 |
113.4 |
33.1 |
12.8 |
11.7 |
1.5 |
1.5 |
Premium/(discount) to peer group (%) |
575.8 |
120.5 |
48.1 |
63.9 |
(46.6) |
(55.0) |
Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 2 August 2018.
Our DCF is based on our (unchanged) assumptions of a 1.5% terminal growth rate and 3% terminal EBIT margin. Our WACC of 5.9% is based on an equity risk premium of 4.5%, a borrowing spread of 5% and beta of 0.9. Our fair value moves up to €3.35 per share from €3.30 in light of our changes to estimates as we have incorporated the sale of the prepared salads plant, as discussed above. Below, we show a sensitivity analysis to these assumptions and note that the current share price is discounting a terminal growth rate of 1.0% 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% |
1.12 |
1.66 |
2.20 |
2.74 |
3.27 |
3.81 |
0.5% |
1.33 |
1.92 |
2.51 |
3.10 |
3.69 |
4.28 |
|
1.0% |
1.58 |
2.23 |
2.89 |
3.54 |
4.19 |
4.85 |
|
1.5% |
1.89 |
2.62 |
3.35 |
4.08 |
4.81 |
5.54 |
|
2.0% |
2.27 |
3.10 |
3.93 |
4.76 |
5.58 |
6.41 |
|
2.5% |
2.77 |
3.72 |
4.68 |
5.63 |
6.59 |
7.54 |
|
3.0% |
3.43 |
4.56 |
5.68 |
6.81 |
7.93 |
9.06 |
|
3.5% |
4.38 |
5.74 |
7.11 |
8.47 |
9.84 |
11.20 |
|
4.0% |
5.82 |
7.55 |
9.28 |
11.01 |
12.74 |
14.47 |
Source: Edison Investment Research
Exhibit 4: Financial summary
€000s |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||||
Revenue |
|
|
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 |
8,018 |
8,750 |
9,214 |
Normalised operating profit |
|
|
2,752 |
1,554 |
(1,254) |
864 |
2,105 |
3,416 |
3,827 |
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 |
2,105 |
3,416 |
3,827 |
||
Net Interest |
(811) |
(678) |
(692) |
(996) |
(1,665) |
(1,648) |
(1,622) |
||
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) |
(25) |
547 |
1,875 |
2,311 |
Profit Before Tax (reported) |
|
|
1,803 |
603 |
11,459 |
(309) |
547 |
1,875 |
2,311 |
Reported tax |
(1,012) |
(87) |
556 |
47 |
(191) |
(656) |
(809) |
||
Profit After Tax (norm) |
809 |
30 |
(2,153) |
(229) |
355 |
1,219 |
1,502 |
||
Profit After Tax (reported) |
791 |
517 |
12,015 |
(261) |
355 |
1,219 |
1,502 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
200 |
0 |
0 |
||
Net income (normalised) |
809 |
30 |
(2,153) |
(229) |
355 |
1,219 |
1,502 |
||
Net income (reported) |
791 |
517 |
12,015 |
(261) |
555 |
1,219 |
1,502 |
||
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) |
0.03 |
0.09 |
0.11 |
EPS - diluted normalised (€) |
|
|
0.08 |
0.00 |
(0.20) |
(0.02) |
0.03 |
0.09 |
0.11 |
EPS - basic reported (€) |
|
|
0.08 |
0.05 |
1.09 |
(0.02) |
0.04 |
0.09 |
0.11 |
Dividend (€) |
0.06 |
0.06 |
0.06 |
0.00 |
0.04 |
0.04 |
0.04 |
||
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 |
4.3 |
4.7 |
4.9 |
||
Normalised Operating Margin |
2.7 |
1.6 |
-1.0 |
0.5 |
1.1 |
1.8 |
2.0 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
64,185 |
64,540 |
129,773 |
132,731 |
132,517 |
132,769 |
133,024 |
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 |
110,617 |
110,883 |
111,152 |
||
Investments & other |
808 |
992 |
2,954 |
2,393 |
2,393 |
2,393 |
2,393 |
||
Current Assets |
|
|
36,689 |
41,122 |
60,457 |
78,611 |
74,282 |
75,054 |
76,111 |
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 |
21,204 |
21,583 |
22,241 |
||
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 |
63,453 |
64,071 |
64,974 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
40,464 |
40,810 |
63,542 |
63,097 |
63,453 |
64,071 |
64,974 |
CASH FLOW |
|||||||||
Op Cash Flow before WC and tax |
5,845 |
4,851 |
2,905 |
7,245 |
8,018 |
8,750 |
9,214 |
||
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 |
(191) |
(656) |
(809) |
||
Net operating cash flow |
|
|
6,515 |
1,560 |
(11,661) |
8,480 |
8,058 |
8,212 |
8,523 |
Capex |
(2,107) |
(3,914) |
(4,095) |
(9,849) |
(5,900) |
(5,586) |
(5,642) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
200 |
0 |
0 |
||
Net interest |
(811) |
(678) |
(692) |
(996) |
(1,665) |
(1,648) |
(1,622) |
||
Equity financing |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Dividends |
(600) |
(600) |
(600) |
0 |
0 |
(600) |
(600) |
||
Other |
2,293 |
5,031 |
(1,131) |
21,436 |
0 |
0 |
0 |
||
Net Cash Flow |
5,291 |
1,399 |
(18,178) |
19,071 |
693 |
378 |
659 |
||
Opening net debt/(cash) |
|
|
19,950 |
17,189 |
20,654 |
60,230 |
62,383 |
66,653 |
66,275 |
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 |
66,653 |
66,275 |
65,616 |
Source: Company data, Edison Investment Research
|
|