Centrale del Latte d'Italia |
Strong revenue growth |
H117 results |
Food & beverages |
9 August 2017 |
Share price performance
Business description
Next events
Analysts
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* |
EPS* |
DPS |
P/E |
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 |
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
|
|