Centrale del Latte d'italia

Transcription

1 Centrale del Latte d'italia Integration proceeding to plan Q316 results Food & beverages The domestic market remains challenging and beset by deflation, and Centrale del Latte d Italia s (CLI s) flat nine-month revenues led to lower profitability as a result of increased brand support costs. The merger between Centrale del Latte di Torino (CLT) and Centrale del Latte di Firenze, Pistoia e Livorno (CLF) completed as expected on 30 September The new entity has been formed and is now the third largest dairy/cheese player in Italy. We maintain our forecasts and valuation. Year end Revenue ( m) PBT* ( m) EPS* (c) DPS (c) P/E (x) Yield (%) 12/ N/A /16e /17e /18e Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Flat 9M16 revenues lead to lower profitability Total 9M16 revenue was broadly flat on the previous year, but this was mainly driven by lower pricing in bulk milk and cream. Net of this, sales were up 0.6%, which demonstrates that the group s brands are growing. That said, profitability was lower as there were increased costs associated with brand support and sales functions. In addition, there were increased maintenance costs and costs associated with the merger with CLF. CLF merger completed on schedule CLT has been acquisitive over the past 20 years, slowly increasing its geographic reach beyond the Turin area and throughout three regions in Northern Italy. The acquisition of CLF is its largest yet and has added Tuscany as a new region. In addition, the Mukki brand (owned by CLF) is an attractive proposition and will be rolled out across CLT s existing portfolio, and potentially beyond to international markets to which CLI has started exporting. The risk is that the merger integration becomes a distraction for management, although CLI has significant experience in this regard, having been so acquisitive over the years. Valuation: Fair value remains 2.83 per share Our DCF model points to a fair value of 2.83 per share (unchanged) for the new entity, implying 2% upside from the current share price. We calculate that CLI now trades at 19.9x FY17e P/E and 8.8x EV/EBITDA, with a 2.2% dividend yield. This is a premium of 9% on P/E and a discount of 6% on EV/EBITDA to the average of our peer group of dairy processors. We estimate that the CLF merger is significantly earnings enhancing (c 80% accretion in the first full year). Our forecasts remain unchanged as they already took account of the merger completing on 30 September. 18 November 2016 Price 2.78 Market cap 39m Net debt ( m) at 30 June Shares in issue 14.0m Free float 30% Code Primary exchange Secondary exchange Share price performance CLI STAR (Borsa Italiana) NA % 1m 3m 12m Abs 0.4 (1.7) (16.3) Rel (local) 1.0 (1.6) week high/low 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 FY16 results March 2017 Analysts Sara Welford +44 (0) Paul Hickman +44 (0) consumer@edisongroup.com Edison profile page Centrale del Latte d'italia Centrale del Latte d'italia is a research client of Edison Investment Research Limited

2 9M16 results review Total 9M16 revenue of 71.8m was broadly flat versus 9M15 ( 71.7m). Like in H116, sales of bulk milk and cream were affected by lower prevailing spot prices (and lower volumes), hence the remainder of the business witnessed sales up 0.6% in 9M16. Fresh milk and extended shelf life (ESL) sales were up 0.3%, which is encouraging, while UHT milk sales were down 1.2% due to aggressive promotional activity by the competition, in which CLI chose not to participate. While the market continues to suffer from deflation, CLT s sales growth adjusted for bulk milk and cream demonstrates the strength of its products and brands. EBITDA of 2.0m in 9M16 compares with 4.1m in 9M15. Profitability suffered due to a number of factors, including: Increased (one-off) costs associated with expanding and supporting CLT s brands in new areas that are adjacent to its existing geographies of strength. This has involved a ramp-up in marketing costs and in sales and distribution costs. These will be absorbed through operating leverage once the business has expanded, but obviously remained relatively high in the rampup phase. Increased administration costs associated with the CLF merger. Increased costs of brand support in general. One-off maintenance costs to improve efficiencies. Financials We leave our forecasts unchanged. For the standalone CLT business, we forecast 0.3% revenue CAGR, translating into 5.6% EBITDA CAGR and 21.2% net profit CAGR in e. For CLF we have assumed very little growth between 2014 (the last available standalone accounts) and 2016, which is consistent with the trend in previous years. We have assumed sales of 84m for the CLF business in both 2016 and 2017, and EBITDA of 5.6m, in line with the reported 2014 figures (on an IFRS basis). We forecast EBIT margin progression for the overall entity as CLF s business had EBIT margins of 3.4% in 2014 (vs CLT s 2.7%), with margin then settling at our 3% terminal EBIT margin assumption (see our DCF valuation section below). Valuation CLT s share price has fallen 3.8% over the last three months vs the FTSE MIB, which has been flat (+0.1%). It has underperformed relative to the FTSE MIB on a three- and six-month basis, but it has outperformed on a 12-month basis. On 2017 estimates, CLI trades at 19.9x P/E and 8.8x EV/EBITDA, with a 2.2% dividend yield. This is a premium of 9% on P/E and a discount of 6% on EV/EBITDA to the average of our peer group of dairy processors (although we note the peer group companies are much larger than CLI). Centrale del Latte d'italia 18 November

3 Exhibit 1: Benchmark valuation of CLI relative to peers Market cap (m) P/E (x) EV/EBITDA (x) Dividend yield (%) 2016e 2017e 2016e 2017e 2016e 2017e Valsoia % 1.6% Parmalat 4, % 0.8% Dairy Crest % 4.0% Dean Foods $1, % 2.0% Saputo $17, % 1.4% Peer group average % 2.0% CLI % 2.2% Premium/(discount) to peer group 123.2% 8.9% 45.2% -5.6% 15.9% 9.5% Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 14 November We use DCF analysis to value the shares and calculate a fair value of 2.83 (unchanged), or 2% upside from the current level. We have assumed no cost synergies from the recent merger, which is in line with company guidance. For the sake of prudence, we have assumed no revenue synergies and have based our CLF forecasts on the information that is currently available. Our DCF is based on our 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) with a terminal growth rate of c 1.5%. Exhibit 2: DCF sensitivity ( /share) to terminal growth rate and EBIT margin Terminal growth Terminal EBIT margin 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 0.00% % % % % % % % % Source: Edison Investment Research Centrale del Latte d'italia 18 November

4 Exhibit 3: Financial summary 'k e 2017e 2018e 31-December IFRS IFRS IFRS IFRS IFRS IFRS INCOME STATEMENT Revenue 99, ,558 98, , , ,032 Cost of Sales (80,923) (82,415) (78,796) (94,177) (145,223) (145,040) Gross Profit 19,044 20,143 19,523 23,924 37,810 37,993 EBITDA 4,911 5,845 4,851 6,445 10,904 11,270 Normalised operating profit 1,379 2,752 1,554 1,908 4,764 5,245 Amortisation of acquired intangibles Exceptionals (250) (134) Share-based payments Reported operating profit 1,129 2,618 1,699 1,908 4,764 5,245 Net Interest (675) (811) (678) (876) (1,755) (1,700) Joint ventures & associates (post tax) (4) (4) (418) Exceptionals 1, Profit Before Tax (norm) 2,347 1, ,032 3,008 3,545 Profit Before Tax (reported) 2,097 1, ,032 3,008 3,545 Reported tax (827) (1,012) (87) (361) (1,053) (1,241) Profit After Tax (norm) 2, ,955 2,305 Profit After Tax (reported) 1, ,955 2,305 Minority interests Discontinued operations Net income (normalised) 2, ,955 2,305 Net income (reported) 1, ,955 2,305 Basic average number of shares outstanding (m) EPS - basic normalised ( ) EPS - diluted normalised ( ) EPS - basic reported ( ) Dividend ( ) Revenue growth (%) #DIV/0! 2.6 (-4.1) Gross Margin (%) EBITDA Margin (%) Normalised Operating Margin BALANCE SHEET Fixed Assets 65,064 64,185 64, , , ,039 Intangible Assets 11,777 11,706 11,539 18,371 18,204 18,036 Tangible Assets 52,652 51,671 52, , , ,711 Investments & other ,292 5,292 5,292 Current Assets 35,647 36,689 41,122 60,442 59,391 60,967 Stocks 3,473 3,438 3,541 7,932 6,525 6,517 Debtors 16,210 15,720 14,370 31,523 27,157 27,157 Cash & cash equivalents 7,822 10,051 12,192 6,969 11,690 13,274 Other 8,141 7,481 11,019 14,019 14,019 14,019 Current Liabilities (34,211) (33,232) (35,004) (65,737) (67,445) (67,388) Creditors (23,402) (23,744) (24,247) (42,980) (44,687) (44,631) Tax and social security (333) (468) (357) (357) (357) (357) Short term borrowings (10,475) (9,021) (10,401) (22,401) (22,401) (22,401) Other Long Term Liabilities (25,776) (27,178) (29,847) (67,297) (62,957) (62,957) Long term borrowings (17,297) (18,219) (22,446) (39,446) (39,446) (39,446) Other long term liabilities (8,479) (8,960) (7,402) (27,851) (23,511) (23,511) Net Assets 40,723 40,464 40,810 57,081 58,196 59,661 Minority interests Shareholders' equity 40,723 40,464 40,810 57,081 58,196 59,661 CASH FLOW Op Cash Flow before WC and tax 4,911 5,845 4,851 6,445 10,904 11,270 Working capital 1,715 1,811 (1,942) (3,959) 4,140 (48) Exceptional & other 31 (129) (1,262) Tax (827) (1,012) (87) (361) (1,053) (1,241) Net operating cash flow 5,829 6,515 1,560 2,125 13,991 9,981 Capex (781) (2,107) (3,914) (4,370) (5,674) (5,857) Acquisitions/disposals Net interest (675) (811) (678) (876) (1,755) (1,700) Equity financing Dividends (200) (600) (600) (600) (840) (840) Other (5,923) 2,293 5, Net Cash Flow (1,748) 5,291 1,399 (3,721) 5,721 1,584 Opening net debt/(cash) 25,676 19,950 17,189 20,654 54,878 50,157 FX Other non-cash movements 7,474 (2,529) (4,865) (30,503) (1,000) 0 Closing net debt/(cash) 19,950 17,189 20,654 54,878 50,157 48,573 Source: Edison Investment Research, Centrale del Latte d'italia accounts Centrale del Latte d'italia 18 November

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