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Centrale del Latte d’Italia — Deteriorating consumer environment

Centrale del Latte d’Italia — Deteriorating consumer environment

The economic and consumer environment in Italy remained challenging in Q3, and Centrale del Latte d’Italia (CLI) also faced tough comparatives as we start to cycle a full year of price increases. The export business continued to be a stand-out performer, albeit from a low base. We leave our forecasts unchanged, but we note the current headwinds are unlikely to abate in the near future. We expected H2 to be more difficult than H1 as the comparatives got tougher, so we leave our estimates unchanged. Our fair value remains €3.35 per share.

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Written by

Centrale del Latte d'Italia

Deteriorating consumer environment

9m18 results

Food & beverages

12 November 2018

Price

€2.76

Market cap

€39m

Net debt (€m) at 30 September 2018

76.4

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

(2.8)

(6.8)

(26.3)

Rel (local)

1.2

5.0

(13.2)

52-week high/low

€3.7

€2.6

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

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

The economic and consumer environment in Italy remained challenging in Q3, and Centrale del Latte d’Italia (CLI) also faced tough comparatives as we start to cycle a full year of price increases. The export business continued to be a stand-out performer, albeit from a low base. We leave our forecasts unchanged, but we note the current headwinds are unlikely to abate in the near future. We expected H2 to be more difficult than H1 as the comparatives got tougher, so we leave our estimates unchanged. Our fair value remains €3.35 per share.

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

2.2

12/17

187.5

(0.03)

(1.63)

0.00

N/A

N/A

12/18e

184.4

0.55

2.54

4.29

108.7

1.6

12/19e

186.2

1.87

8.71

4.29

31.7

1.6

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

Mixed performance: Dairy products down

Fresh milk performed very well in H118 but took a sudden turn during Q3 as overall consumption in the market declined and caused the division to be down 8.7% in revenue terms. Management had expected an improvement in September given marketing initiatives, but this failed to materialise. UHT milk continued to decline as strong promotional activity by the competition remained a feature. The yogurt segment continued to suffer from tough competition.

Prepared products and export growing rapidly

The prepared salads segment remained affected by the weak economic backdrop, which had an impact on consumption. The prepared salads plant was sold in exchange for a distribution agreement with Zerbinati, and this was effective as of 1 September. 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. Other prepared products continued to perform well, with sales up 47% in the period as CLI continues to add new ranges to expand the business. The export business grew more than eightfold, albeit from a low base, but now accounting for over 4% of turnover in the quarter.

Valuation: Fair value of €3.35 per share

Our DCF model points to a fair value of €3.35 per share, implying 24% upside. We assume 1.5% terminal growth rate, 3% terminal EBIT margin and a WACC of 5.9% (unchanged). We calculate that for FY19e CLI now trades on a P/E of 31.7x and EV/EBITDA of 11.5x. On EV/EBITDA, CLI trades at a premium of c 43% to our peer group of dairy processors.

9m18 results review

The consumer environment continued to be extremely tough in Q3 following a difficult H1. The fresh milk business suddenly deteriorated, with a noticeable drop in consumption, and a particularly weak month in September. 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 9m as CLI’s business continued to suffer 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 9m18 value of production (total revenue) of €135.8m compares to €135.0m in 9m17. Net revenue/sales came in at €133.8m vs €132.1m in 9m117. 9m18 EBITDA of €5.4m is comfortably ahead of €5.0m in 9m17. 9m gross margins were up (18.4% vs 18.1% in 9m17), although Q3 gross margins were lower (18.1% vs 18.4% in Q317). EBITDA margins were up 30bp to 4.0% in 9m18 (but down 70bp in Q3). We leave our underlying forecasts unchanged: we had expected comparatives to become tougher in H2 as we started to cycle the price increases implemented during 2017.

Valuation

CLI’s share price performance has performed broadly in line with the FTSE MIB on a three- and six-month basis and underperformed on a 12-month basis. On 2019 estimates, CLI trades on a P/E of 31.7x and EV/EBITDA of 11.5x.

On EV/EBITDA, CLI trades at a premium of c 43% to the average of our peer group of dairy processors; we note that the companies in our peer group are much larger than CLI, and elevated debt levels and relatively low liquidity distort CLI’s multiples.

Exhibit 1: 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

€5,194.4

29.2

23.3

N/A

N/A

0.8

0.8

Dairy Crest

£693.0

11.9

11.1

9.0

8.5

5.4

5.5

Dean Foods

$518.9

27.3

19.2

5.9

5.2

5.2

6.3

Saputo

$15,057.3

19.0

16.9

11.7

10.4

1.8

1.9

Peer group average

21.8

17.6

8.9

6.8

8.0

3.3

CLI

€37.8

106.4

31.0

12.5

11.4

1.6

1.6

Premium/(discount) to peer group (%)

387.0

76.0

41.1

42.8

(51.8)

(56.3)

Source: Edison Investment Research estimates and Thomson consensus. Note: Prices at 9 November 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 remains unchanged at €3.35 per share. 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 2.9% (which compares to CLT’s pre-merger reported EBIT margin of 2.7% in 2014 and 1.6% in 2015).

Exhibit 2: 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

2.19

2.73

3.27

3.80

0.5%

1.33

1.92

2.51

3.09

3.68

4.27

1.0%

1.58

2.23

2.88

3.53

4.18

4.84

1.5%

1.88

2.61

3.35

4.07

4.80

5.53

2.0%

2.26

3.09

3.92

4.74

5.57

6.40

2.5%

2.76

3.71

4.66

5.62

6.57

7.52

3.0%

3.42

4.54

5.67

6.79

7.91

9.03

3.5%

4.36

5.72

7.09

8.45

9.81

11.17

4.0%

5.80

7.52

9.25

10.97

12.70

14.42

Source: Edison Investment Research

Exhibit 3: Financial summary

€'k

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: Edison Investment Research, company data

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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. 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

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NSW 2000, Australia

Research: Industrials

Carr’s Group — Recovery in both divisions confirmed

The FY18 results for Carr’s Group show that it has delivered the promised recovery in both divisions. This is the result of (1) market conditions which have boosted demand for feed blocks in the US and a wide range of agricultural inputs in the UK; and (2) prior year investment, for example in feed block production capacity and in acquisitions. Noting that the FY18 performance was ahead of our estimates, we revise our FY19 and FY20 forecasts upwards and raise our indicative valuation by 4p/share to 182p/share.

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