Steady progress

Centrale del Latte d'Italia 6 August 2018 Update
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Centrale del Latte d'Italia

Steady progress

H118 results

Food & beverages

 

6 August 2018

Price

€2.96

Market cap

€41m

Net debt (€m) at 30 June 2018

€70.9

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

0.3

(10.8)

5.8

Rel (local)

0.9

(1.3)

6.7

52-week high/low

€4.3

€2.8

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

9M18 results

November 2018

FY18 results

March 2019

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

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.

Category performance remains mixed

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.

Prepared salads plant sale

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.

Valuation: Fair value of €3.35 per share

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.

H118 results review

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).

Prepared salads plant sale

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

Valuation

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

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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Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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US

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Level 12, Office 1205

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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

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

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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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