Strong revenue growth

Centrale del Latte d'Italia 9 August 2017 Update
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Centrale del Latte d'Italia

Strong revenue growth

H117 results

Food & beverages

9 August 2017

Price

€2.96

Market cap

€42m

Net debt (€m) at 31 December 2016

60.2

Shares in issue

14.0m

Free float

41%

Code

CLI

Primary exchange

STAR (Borsa Italiana)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.2

3.3

1.7

Rel (local)

1.3

0.4

(23.0)

52-week high/low

€3.3

€2.7

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

9m17 results

10 November 2017

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

Price increases implemented during the course of H117 have been successful and organic sales growth of 4.8% is impressive. This leads us to raise our revenue forecasts for Centrale del Latte d’Italia (CLI) by 2% and our profit forecasts rise by 5-11%. Management expects the recovery to continue into Q317 and beyond as the full effect of the price increases comes through. Our fair value rises to €2.94 (from €2.82).

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

98.3

0.46

0.30

6.00

986.7

2.0

12/16

119.8

(2.09)

(19.57)

6.00

N/A

2.0

12/17e

181.0

0.60

4.40

6.00

67.3

2.0

12/18e

181.9

1.09

8.01

6.00

37.0

2.0

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

Price increases drive top-line growth

Price increases were implemented on 1 April in order to offset some cost inflation, but they were fully rolled out on 1 June. In addition spot milk prices have started to fall, so the backdrop for H217 is far more benign. We continue to forecast an EBITDA margin of 4.8% for FY17 vs 2.7% in H117, hence implying 7.0% margin during the balance of 2017, which should be achievable given the price increases that have been put through.

Strategic focus paying off

CLI’s focus on its core geographical markets and its brands has ensured consumers are willing to withstand price increases on its products. Market share has grown in value terms across a number of segments, and CLI has retained its position as the third-largest dairy player in Italy. It remains the market leader in fresh and extended shelf life (ESL) milk, and UHT milk in the regions where it operates (Piedmont, Lombardy, Tuscany and Veneto). The company now expects some recovery in the overall market over the course of H217, and we believe it is in a good position to benefit from this.

Valuation: Fair value of €2.94 per share

Our DCF model points to a fair value of €2.94 per share (from €2.82), implying that the stock is fairly valued. We calculate that for FY17e CLI now trades at 67.3x P/E and 11.3x EV/EBITDA, with a 2.0% dividend yield. The P/E is inflated in part due to the high interest costs as a result of the elevated debt level in the short term associated with the merger by incorporation with Centrale del Latte di Firenze (CLF) in September 2016 (detailed in our note). We expect these to normalise by 2019. On EV/EBITDA, CLI trades at a premium of 15% to the average of our peer group of dairy processors.

H117 results review

CLI’s total H117 revenue of €90.5m compares to revenue of €48.8m in H116. While most of the growth was of course due to the merger with CLF, the group did also witness an impressive level of underlying organic growth, at c 5%. Price increases implemented through H117 have been successfully received by consumers and the full effect is expected to come through from Q317. Sales of bulk milk and cream increased significantly due to higher spot prices, vegetable drinks witnessed strong growth as the category as a whole is still being buoyed by consumer trends, and exports also improved significantly.

Market share data confirm the positive sales trends: CLI grew its share in fresh milk, UHT milk and yoghurt, both in the Italian market overall and in the specific regions where it operates, ie Piedmont, Liguria, Tuscany and Veneto (source: IRI Infoscan). CLI retained its position as the third dairy player in Italy by growing its market share by value from 7.3% to 7.7% in fresh and ESL milk, and from 3.7% to 3.9% in UHT milk. It continues to be market leader in the regions where it operates, with value share of 28.5% in fresh and ESL milk (vs 27.6% in 2016), and 14.4% share in UHT milk, which represents 110bps growth vs the prior year.

EBITDA of €2.5m in H117 compares with €1.6m in H116, though margins were down 40bps to 2.7%. There was a significant recovery during Q2, as margins were 1.5% in Q117. The recovery was mainly driven by the above-mentioned price increases and also better cost control.

Given the positive effect of the price increases that have been implemented through H117, management expects the recovery to continue into Q317 and beyond.

Exhibit 1: Organic revenue growth by division

H116 (€000)

H117 (€000)

M&A (€000)

Organic growth (€000)

Organic growth

Fresh milk

20,669

36,637

15,987

(19)

-0.1%

UHT milk

9,088

19,080

9,874

118

1.3%

Yoghurt

3,444

4,411

1,149

(182)

-5.3%

Salads

2,980

3,302

321

1

0.0%

Bulk milk & cream

1,194

2,129

457

478

40.0%

Other

10,069

22,890

11,413

1,408

14.0%

Vegetable drinks

815

1,348

190

344

42.1%

Export

524

737

0

213

40.6%

Total

48,784

90,534

39,390

2,360

4.8%

Source: Centrale del Latte d’Italia data, Edison Investment Research

Financials

We raise our organic revenue growth forecast for FY17 from 1% to 4% on the back of encouraging H117 results. We leave our margin forecasts unchanged, which means our FY17 EBITDA forecast increases to €8.7m (from €8.5m) and net income increases to €0.39m from €0.35m. We illustrate the changes to our key forecasts in Exhibit 2.

Exhibit 2: Old vs new forecasts, 000s

2017e

2018e

2019e

Old

New

% change

Old

New

% change

Old

New

% change

Revenue

177,464

180,998

2.0%

178,351

181,903

2.0%

179,243

182,812

2.0%

EBITDA

8,547

8,717

2.0%

8,946

9,124

2.0%

9,349

9,536

2.0%

PBT

537

598

11.4%

1,016

1,088

7.1%

1,839

1,929

4.9%

Net income

349

389

11.4%

661

707

7.1%

1,195

1,254

4.9%

EPS (reported), €

0.02

0.03

11.4%

0.05

0.05

7.1%

0.09

0.09

4.9%

Source: Edison Investment Research

Valuation

CLI’s share price has increased 2.4% over the last three months vs the FTSE MIB, which is up 3.6%. It has also underperformed relative to the FTSE MIB on a six- and 12-month basis. On 2017 estimates, CLI trades at 67.3x P/E and 11.3x EV/EBITDA, with a 2.0% dividend yield. The P/E is inflated due to the high level of debt following the merger, and hence the high interest costs. These contribute to a squeeze on earnings. The leverage in the business means we expect earnings to return to a more normal level by FY19. On EV/EBITDA, CLI trades at a premium of 14.6% to the average of our peer group of dairy processors (although we note the peer group companies are much larger than CLI).

Exhibit 3: Benchmark valuation of CLI relative to peers

Market cap
(m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2017e

2018e

2017e

2018e

2017e

2018e

Parmalat

€5,691.6

31.0

30.7

9.8

8.2

0.6%

0.6%

Dairy Crest

£836.6

15.7

14.9

11.7

11.1

3.9%

4.0%

Dean Foods

$1,340.5

11.5

10.7

5.1

4.7

2.6%

2.8%

Saputo

$16,846.8

21.4

19.6

12.7

11.7

1.5%

1.6%

Peer group average

19.9

19.0

9.8

8.9

2.1%

2.3%

CLI

€40.7

66.1

36.3

11.2

10.7

2.1%

2.1%

Premium/(discount) to peer group (%)

232.3%

91.3%

14.6%

20.2%

-3.5%

-8.9%

Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 7 August 2017.

We use DCF analysis to value the shares and calculate a fair value of €2.94 (previously €2.82), implying the stock is fairly valued. We have assumed no cost synergies from the merger with CLF, which is in line with company guidance. We have also rolled forward our DCF to 2018.

Our DCF is based on our (unchanged) assumptions of 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 EBIT margin of 2.9% (which compares to CLT’s reported EBIT margin of 2.7% in 2014 and 1.6% in 2015; Centrale del Latte di Torino, or CLT, merged with CLF in September 2016, and the new entity was renamed Centrale del Latte d’Italia), with a terminal growth rate of c 1.5%.

Exhibit 4: DCF sensitivity (€/share) to terminal growth rate and EBIT margin

Terminal EBIT margin

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Terminal growth

0.00%

0.85

1.35

1.85

2.35

2.85

3.34

0.50%

1.04

1.59

2.14

2.69

3.24

3.79

1.00%

1.28

1.89

2.50

3.11

3.72

4.33

1.50%

1.57

2.26

2.94

3.62

4.31

4.99

2.00%

1.94

2.72

3.50

4.27

5.05

5.83

2.50%

2.42

3.32

4.22

5.12

6.02

6.92

3.00%

3.07

4.14

5.20

6.27

7.33

8.40

3.50%

4.01

5.31

6.61

7.92

9.22

10.53

4.00%

5.46

7.14

8.81

10.49

12.16

13.83

Source: Edison Investment Research

Exhibit 5: Financial summary

€000s

2013

2014

2015

2016

2017e

2018e

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

99,967

102,558

98,319

119,762

180,998

181,903

182,812

183,726

Cost of Sales

(80,923)

(82,415)

(78,796)

(98,652)

(144,486)

(145,026)

(145,568)

(146,113)

Gross Profit

19,044

20,143

19,523

21,110

36,512

36,877

37,244

37,614

EBITDA

 

 

4,911

5,845

4,851

2,905

8,717

9,124

9,536

9,951

Normalised operating profit

 

 

1,379

2,752

1,554

(1,254)

2,737

3,230

4,065

4,453

Amortisation of acquired intangibles

0

0

0

0

0

0

0

0

Exceptionals

(250)

(134)

145

(355)

0

0

0

0

Share-based payments

0

0

0

0

0

0

0

0

Reported operating profit

1,129

2,618

1,699

(1,609)

2,737

3,230

4,065

4,453

Net Interest

(675)

(811)

(678)

(692)

(1,996)

(1,999)

(1,993)

(1,979)

Joint ventures & associates (post tax)

(4)

(4)

(418)

(143)

(143)

(143)

(143)

(143)

Exceptionals

1,646

0

0

13,903

0

0

0

0

Profit Before Tax (norm)

 

 

2,347

1,937

458

(2,089)

598

1,088

1,929

2,331

Profit Before Tax (reported)

 

 

2,097

1,803

603

11,459

598

1,088

1,929

2,331

Reported tax

(827)

(1,012)

(87)

556

(209)

(381)

(675)

(816)

Profit After Tax (norm)

2,042

809

30

(2,153)

616

1,121

1,988

2,402

Profit After Tax (reported)

1,270

791

517

12,015

389

707

1,254

1,515

Minority interests

0

0

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

0

0

Net income (normalised)

2,042

809

30

(2,153)

616

1,121

1,988

2,402

Net income (reported)

1,270

791

517

12,015

389

707

1,254

1,515

Basic average number of shares outstanding (m)

10

10

10

11

14

14

14

14

EPS - basic normalised (€)

 

 

0.20

0.08

0.00

(0.20)

0.04

0.08

0.14

0.17

EPS - diluted normalised (€)

 

 

0.20

0.08

0.00

(0.20)

0.04

0.08

0.14

0.17

EPS - basic reported (€)

 

 

0.13

0.08

0.05

1.09

0.03

0.05

0.09

0.11

Dividend (€)

0.06

0.06

0.06

0.06

0.06

0.06

0.06

0.06

Revenue growth (%)

N/A

2.6

(-4.1)

21.8

51.1

0.5

0.5

0.5

Gross Margin (%)

19.0

19.6

19.9

17.6

20.2

20.3

20.4

20.5

EBITDA Margin (%)

4.9

5.7

4.9

2.4

4.8

5.0

5.2

5.4

Normalised Operating Margin

1.4

2.7

1.6

-1.0

1.5

1.8

2.2

2.4

BALANCE SHEET

Fixed Assets

 

 

65,064

64,185

64,540

129,773

129,404

129,331

129,527

129,725

Intangible Assets

11,777

11,706

11,539

19,484

19,411

19,337

19,264

19,191

Tangible Assets

52,652

51,671

52,010

107,335

107,039

107,039

107,309

107,581

Investments & other

634

808

992

2,954

2,954

2,954

2,954

2,954

Current Assets

 

 

35,647

36,689

41,122

60,457

73,127

73,303

73,756

74,469

Stocks

3,473

3,438

3,541

7,698

11,274

11,316

11,358

11,401

Debtors

16,210

15,720

14,370

28,209

43,347

43,564

43,782

44,001

Cash & cash equivalents

7,822

10,051

12,192

9,521

3,213

3,130

3,323

3,775

Other

8,141

7,481

11,019

15,030

15,293

15,293

15,293

15,293

Current Liabilities

 

 

(34,211)

(33,232)

(35,004)

(68,199)

(88,135)

(88,370)

(88,606)

(88,843)

Creditors

(23,402)

(23,744)

(24,247)

(42,910)

(62,845)

(63,081)

(63,316)

(63,553)

Tax and social security

(333)

(468)

(357)

(697)

(697)

(697)

(697)

(697)

Short term borrowings

(10,475)

(9,021)

(10,401)

(24,592)

(24,592)

(24,592)

(24,592)

(24,592)

Other

0

0

0

0

0

0

0

0

Long Term Liabilities

 

 

(25,776)

(27,178)

(29,847)

(58,489)

(51,306)

(51,306)

(51,306)

(51,306)

Long term borrowings

(17,297)

(18,219)

(22,446)

(45,159)

(45,159)

(45,159)

(45,159)

(45,159)

Other long term liabilities

(8,479)

(8,960)

(7,402)

(13,330)

(6,147)

(6,147)

(6,147)

(6,147)

Net Assets

 

 

40,723

40,464

40,810

63,542

63,090

62,958

63,371

64,046

Minority interests

0

0

0

0

0

0

0

0

Shareholders' equity

 

 

40,723

40,464

40,810

63,542

63,090

62,958

63,371

64,046

CASH FLOW

Op Cash Flow before WC and tax

4,911

5,845

4,851

2,905

8,717

9,124

9,536

9,951

Working capital

1,715

1,811

(1,942)

(30)

(2,119)

(24)

(24)

(25)

Exceptional & other

31

(129)

(1,262)

(15,092)

(143)

(143)

(143)

(143)

Tax

(827)

(1,012)

(87)

556

(209)

(381)

(675)

(816)

Net operating cash flow

 

 

5,829

6,515

1,560

(11,661)

6,245

8,576

8,693

8,967

Capex

(781)

(2,107)

(3,914)

(4,095)

(5,611)

(5,821)

(5,667)

(5,696)

Acquisitions/disposals

0

0

0

0

0

0

0

0

Net interest

(675)

(811)

(678)

(692)

(1,996)

(1,999)

(1,993)

(1,979)

Equity financing

0

0

0

0

0

0

0

0

Dividends

(200)

(600)

(600)

(600)

(840)

(840)

(840)

(840)

Other

(5,923)

2,293

5,031

(1,131)

0

0

0

0

Net Cash Flow

(1,748)

5,291

1,399

(18,178)

(2,202)

(83)

193

452

Opening net debt/(cash)

 

 

25,676

19,950

17,189

20,654

60,230

66,538

66,621

66,428

FX

0

0

0

0

0

0

0

0

Other non-cash movements

7,474

(2,529)

(4,865)

(21,397)

(4,107)

0

0

0

Closing net debt/(cash)

 

 

19,950

17,189

20,654

60,230

66,538

66,621

66,428

65,976

Source: Edison Investment Research, Centrale del Latte d’Italia data

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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

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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