Centrale del Latte di Torino

Challenging backdrop

H116 results

Food & beverages

5 August 2016

Price	€2.83
Market cap	€28m

Net debt (€m) at 30 June 2016		21.7

Shares in issue		10.0m
Free float		41%
Code		CLT

Primary exchange	STAR (Borsa Italiana)
Secondary exchange		N/A

Share price performance

%	1m	3m	12m
Abs	3.8	(2.4)	(16.7)
Rel (local)	2.2	7.1	17.6

52-week high/low

US$3.978

US$2.57

Business description

Centrale del Latte di Torino 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 and Liguria regions.

Next event

Q316 results

14 November 2016

Analysts

Sara Welford	+44 (0) 20 3077 5700
Paul Hickman	+44 (0)20 3681 2501

consumer@edisongroup.com

Edison profile page

Centrale del Latte di Torino is a research client of Edison Investment Research Limited

The domestic market remains tough and is characterised by deflation. Centrale del Latte di Torino’s (CLT) flat H1 revenues led to lower profitability as a result of increased brand support costs. In light of the currently challenging backdrop, management now expects flat continuing revenues for 2016. We cut our forecasts to reflect this and our fair value is reduced to €2.83/share, with no upside to the current market.

Year end	Revenue (€m)	PBT* (€m)	EPS* (c)	DPS (c)	P/E (x)	Yield (%)
12/15	98.3	0.46	0.30	6.00	N/A	2.1
12/16e	118.1	1.03	6.10	6.00	46.4	2.1
12/17e	183.0	3.01	13.97	6.00	20.3	2.1
12/18e	183.0	3.55	16.46	6.00	17.2	2.1

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

Flat H116 revenues lead to lower profitability

Total H116 revenue was flat on the previous year, but this was mainly driven by lower pricing in bulk milk and cream. Net of this, sales were up 0.8%, 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 Centrale del Latte di Firenze, Pistoia e Livorno (CLF).

CLF merger scheduled to complete at end September

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 will add Tuscany as a new region. In addition, the Mukki brand (owned by CLF) is an attractive proposition and could be rolled out across CLT’s existing portfolio, and potentially beyond to international markets to which CLT has started exporting.

Valuation: Fair value of €2.83

Based on our updated forecasts, our DCF model points to a fair value of €2.83 per share for the combined entity, or 0% upside from the current share price. We calculate that, on a pro forma, post merger basis, CLT trades at 20.3x FY17e P/E and 8.9x EV/EBITDA, with a 2.1% dividend yield. This is a premium of 16.6% on P/E and a discount of 0.3% on EV/EBITDA vs 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).

H116 results review

Total H116 revenue of €48.7m was flat versus H115. Sales of bulk milk and cream were affected by lower prevailing spot prices, hence the remainder of the business witnessed sales up 0.8% in H116. 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 €1.5m in H116 compares with €3m in H115. 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. CLT expanded its distribution into the Liguria Ponente area between Savona and Imperia. 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 ramp-up phase; and

■

increased administration costs associated with the forthcoming merger with CLF.

Financials

For the standalone CLT business, we now forecast 0.3% revenue CAGR, translating into 5.6% EBITDA CAGR and 21.2% net profit CAGR in 2015-18. Our financial forecasts include the CLF acquisition, but CLT’s management has so far given no financial guidance on the merger and the data available are not complete. The estimates are entirely our own: we have assumed very little growth between 2014 (the last available accounts) and 2016, which is consistent with the trend in the 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).

Our standalone CLT revenue forecasts are conservative. We now model flat sales in 2016, in line with company guidance, and a small bounceback in 2017 to give 1% growth. We forecast flat revenues again in 2018 as we see milk and basic dairy products as a stagnating category with stable or slightly declining volumes and pricing driven mainly by the movement of the underlying commodity. We have cut our 2016 sales forecasts as we previously expected a bounceback following a weak 2015 and due to new product launches in 2016, but we have left our 2017 and 2018 growth assumptions unchanged.

We forecast a small improvement in the underlying CLT gross margin and EBIT margin as we expect the latter to recover following a disappointing 2015. 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: we run a 10-year DCF and hence our terminal EBIT margin is in 2026).

Exhibit 1: Old vs new forecasts for key metrics

€000s	2016e			2017e			2018e
	Old	New	% change	Old	New	% change	Old	New	% change
Revenue	121,975	118,101	(3.2)	186,945	183,032	(2.1)	186,945	183,032	(2.1)
EBITDA	6,657	6,445	(3.2)	11,137	10,904	(2.1)	11,511	11,270	(2.1)
PBT	1,102	1,032	(6.4)	3,126	3,008	(3.8)	3,677	3,545	(3.6)
Net Income	716	671	(6.4)	2,032	1,955	(3.8)	2,390	2,305	(3.6)
EPS (€)	0.07	0.06	(6.4)	0.15	0.14	(3.8)	0.17	0.16	(3.6)

Source: Edison Investment Research

Valuation

CLT’s recent share price performance has been stable and it has outperformed relative to the FTSE MIB on a three-month, six-month and 12-month basis. On 2017 estimates (ie on a pro forma post-merger basis), CLT (CLI post merger) trades at 20.3x P/E and 8.9x EV/EBITDA, with a 2.1% dividend yield. This is a premium of 16.6% on P/E and a discount of 0.7% on EV/EBITDA to the average of our peer group of dairy processors (although we note the peer group companies are much larger than CLT).

Exhibit 2: Benchmark valuation of CLI relative to peers

		P/E (x)		EV/EBITDA (x)		Dividend yield (%)
	Market cap (m)	2016e	2017e	2016e	2017e	2016e	2017e
Valsoia	€186.7	17.6	16.0	9.3	8.5	1.8	1.9
Parmalat	€4,359.6	29.7	22.8	9.0	7.7	0.9	0.9
Dairy Crest	£900.6	16.7	15.7	11.7	11.0	3.7	3.9
Dean Foods	$1,687.6	11.6	12.0	5.0	5.1	2.0	2.0
Saputo	$16,293.3	22.6	20.4	13.5	12.4	1.4	1.5
Peer group average		19.7	17.4	9.7	8.9	1.9	2.0
CLI (post-merger)	€39.6	46.4	20.3	15.0	8.9	2.1	2.1

Premium/(discount) to peer group (%)		136.2	16.6	54.5	-0.7	9.1	3.8

Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 4 August 2016.

We use DCF analysis to value the shares and calculate a fair value of €2.83, or 0% upside from the current level. Given the impending merger with CLF, our valuation is based on the combined entity. We have assumed no cost synergies, 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 5.9% is predicated 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 2.7% (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 3: 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%	1.00	1.48	1.96	2.43	2.91	3.39
	0.50%	1.15	1.67	2.20	2.72	3.24	3.77
	1.00%	1.32	1.90	2.48	3.06	3.64	4.22
	1.50%	1.53	2.18	2.83	3.48	4.13	4.78
	2.00%	1.80	2.53	3.27	4.01	4.75	5.49
	2.50%	2.14	2.99	3.84	4.69	5.55	6.40
	3.00%	2.60	3.60	4.61	5.61	6.62	7.63
	3.50%	3.25	4.47	5.70	6.92	8.15	9.37
	4.00%	4.25	5.81	7.37	8.93	10.49	12.05

Source: Edison Investment Research estimates

Exhibit 4: Financial summary

	€000s	2013	2014	2015	2016e	2017e	2018e
31-December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
INCOME STATEMENT
Revenue		99,967.0	102,558.0	98,318.9	118,101.3	183,032.3	183,032.3
Cost of Sales		(80,923.4)	(82,415.2)	(78,796.3)	(94,177.1)	(145,222.7)	(145,039.7)
Gross Profit		19,043.7	20,142.8	19,522.6	23,924.2	37,809.6	37,992.6
EBITDA		4,910.6	5,844.8	4,850.6	6,445.2	10,903.8	11,269.9
Normalised operating profit		1,379.1	2,751.7	1,553.8	1,908.0	4,763.8	5,245.4
Amortisation of acquired intangibles		0.0	0.0	0.0	0.0	0.0	0.0
Exceptionals		(249.9)	(134.0)	145.0	0.0	0.0	0.0
Share-based payments		0.0	0.0	0.0	0.0	0.0	0.0
Reported operating profit		1,129.1	2,617.6	1,698.8	1,908.0	4,763.8	5,245.4
Net Interest		(674.5)	(810.7)	(678.0)	(876.3)	(1,755.5)	(1,700.0)
Joint ventures & associates (post tax)		(3.9)	(4.2)	(417.6)	0.0	0.0	0.0
Exceptionals		1,646.2	0.0	0.0	0.0	0.0	0.0
Profit Before Tax (norm)		2,346.8	1,936.7	458.2	1,031.7	3,008.3	3,545.4
Profit Before Tax (reported)		2,096.9	1,802.7	603.2	1,031.7	3,008.3	3,545.4
Reported tax		(827.0)	(1,011.6)	(86.6)	(361.1)	(1,052.9)	(1,240.9)
Profit After Tax (norm)		2,042.5	809.4	30.3	670.6	1,955.4	2,304.5
Profit After Tax (reported)		1,269.9	791.1	516.6	670.6	1,955.4	2,304.5
Minority interests		0.0	0.0	0.0	0.0	0.0	0.0
Discontinued operations		0.0	0.0	0.0	0.0	0.0	0.0
Net income (normalised)		2,042.5	809.4	30.3	670.6	1,955.4	2,304.5
Net income (reported)		1,269.9	791.1	516.6	670.6	1,955.4	2,304.5

Basic average number of shares outstanding (m)		10	10	10	11	14	14
EPS - basic normalised (€)		0.20	0.08	0.00	0.06	0.14	0.16
EPS - diluted normalised (€)		0.20	0.08	0.00	0.06	0.14	0.16
EPS - basic reported (€)		0.13	0.08	0.05	0.06	0.14	0.16
Dividend (€)		0.06	0.06	0.06	0.06	0.06	0.06

Revenue growth (%)		n/a	2.6	(4.1)	20.1	55.0	0.0
Gross Margin (%)		19.0	19.6	19.9	20.3	20.7	20.8
EBITDA Margin (%)		4.9	5.7	4.9	5.5	6.0	6.2
Normalised Operating Margin		1.4	2.7	1.6	1.6	2.6	2.9

BALANCE SHEET
Fixed Assets		65,063.6	64,184.5	64,540.0	129,672.6	129,206.5	129,039.1
Intangible Assets		11,776.9	11,706.2	11,538.8	18,371.3	18,203.9	18,036.5
Tangible Assets		52,652.3	51,670.9	52,009.6	106,009.6	105,711.0	105,711.0
Investments & other		634.4	807.5	991.7	5,291.7	5,291.7	5,291.7
Current Assets		35,646.7	36,689.3	41,122.1	60,442.5	59,391.3	60,966.9
Stocks		3,473.1	3,437.8	3,540.6	7,931.8	6,525.5	6,517.2
Debtors		16,210.3	15,719.7	14,370.1	31,523.1	27,157.1	27,157.1
Cash & cash equivalents		7,822.1	10,050.8	12,192.4	6,968.7	11,689.8	13,273.7
Other		8,141.3	7,480.9	11,018.9	14,018.9	14,018.9	14,018.9
Current Liabilities		(34,211.0)	(33,231.9)	(35,004.4)	(65,737.2)	(67,444.6)	(67,388.3)
Creditors		(23,402.2)	(23,743.5)	(24,246.7)	(42,979.6)	(44,687.0)	(44,630.6)
Tax and social security		(333.3)	(467.7)	(356.9)	(356.9)	(356.9)	(356.9)
Short term borrowings		(10,475.4)	(9,020.8)	(10,400.7)	(22,400.7)	(22,400.7)	(22,400.7)
Other		0.0	0.0	0.0	0.0	0.0	0.0
Long Term Liabilities		(25,775.9)	(27,178.1)	(29,847.5)	(67,296.9)	(62,956.9)	(62,956.9)
Long term borrowings		(17,297.0)	(18,218.6)	(22,446.0)	(39,446.0)	(39,446.0)	(39,446.0)
Other long term liabilities		(8,478.9)	(8,959.5)	(7,401.5)	(27,850.9)	(23,510.9)	(23,510.9)
Net Assets		40,723.4	40,463.7	40,810.3	57,080.9	58,196.3	59,660.8
Minority interests		0.0	0.0	0.0	0.0	0.0	0.0
Shareholders' equity		40,723.4	40,463.7	40,810.3	57,080.9	58,196.3	59,660.8

CASH FLOW
Op Cash Flow before WC and tax		4,910.6	5,844.8	4,850.6	6,445.2	10,903.8	11,269.9
Working capital		1,714.6	1,810.8	(1,942.2)	(3,959.2)	4,139.7	(48.1)
Exceptional & other		31.0	(128.7)	(1,262.2)	0.0	0.0	0.0
Tax		(827.0)	(1,011.6)	(86.6)	(361.1)	(1,052.9)	(1,240.9)
Net operating cash flow		5,829.2	6,515.3	1,559.6	2,124.9	13,990.6	9,980.9
Capex		(780.5)	(2,107.1)	(3,913.8)	(4,369.7)	(5,674.0)	(5,857.0)
Acquisitions/disposals		0.0	0.0	0.0	0.0	0.0	0.0
Net interest		(674.5)	(810.7)	(678.0)	(876.3)	(1,755.5)	(1,700.0)
Equity financing		0.0	0.0	0.0	0.0	0.0	0.0
Dividends		(200.0)	(600.0)	(600.0)	(600.0)	(840.0)	(840.0)
Other		(5,922.6)	2,293.5	5,031.4	0.0	0.0	0.0
Net Cash Flow		(1,748.4)	5,290.9	1,399.1	(3,721.2)	5,721.1	1,583.8
Opening net debt/(cash)		25,676.0	19,950.2	17,188.6	20,654.3	54,878.0	50,156.9
FX		0.0	0.0	0.0	0.0	0.0	0.0
Other non-cash movements		7,474.2	(2,529.3)	(4,864.8)	(30,502.6)*	(1,000.0)	0.0
Closing net debt/(cash)		19,950.2	17,188.6	20,654.3	54,878.0	50,156.9	48,573.0

Source: Company data, Edison Investment Research. Note: IFRS valuation of CLF assets not reflected. *Including €'28,000 net debt on merger (due to complete in October 2016).

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Frankfurt +49 (0)69 78 8076 960

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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

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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Germany

London +44 (0)20 3077 5700

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