Centrale del Latte d'italia

Centrale del Latte d'italia Strong revenue growth H117 results Food & beverages 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. 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 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. % 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 consumer@edisongroup.com Edison profile page Centrale del Latte d'italia is a research client of Edison Investment Research Limited

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 Organic growth ( 000) 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 Centrale del Latte d'italia 9 August 2017 2

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 growth Terminal EBIT margin 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 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 Centrale del Latte d'italia 9 August 2017 3

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 Centrale del Latte d'italia 9 August 2017 4

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Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 Centrale Schumannstrasse del 34b Latte d'italia 9 August 280 High 2017 Holborn 295 Madison Avenue, 18th Floor Level 12, Office 1205 5 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10017, New York US Sydney +61 (0)2 8249 8342 95 Pitt Street, Sydney NSW 2000, Australia