Despite the continued challenging consumer environment in Italy and across Western Europe during H118, Centrale del Latte d’Italia’s (CLI’s) business continued to perform well, in part due to the price increases implemented during Q217. Vegetable-based drinks and the export business remained stand-out performers, albeit from a low base, and fresh milk also performed well. We leave our FY18 revenue forecasts unchanged, but we adjust our estimates for the sale of the prepared salads plant. Our EBITDA forecast increases as labour costs are reduced thanks to the new agreement and our fair value nudges up to €3.35 per share (from €3.30).
Fresh milk performed very well, whereas UHT milk continued to decline as strong promotional activity by the competition remained a feature. The yogurt segment continued to suffer from tough competition and the prepared salads segment remained affected by the weak economic backdrop, which had an impact on consumption. Bulk milk and cream is a by-product of dairy processing and is mostly influenced by seasonal supply and demand. Other prepared products continued to perform well. Price increases implemented across the business in H117 have partly driven revenue growth over the past 12 months and we will see the effects of this subside as we cycle a full year of these prices increases.
In June, the company announced it had reached a deal with Zerbinati, an Italian producer of chilled prepared meals such as fresh soups and gluten-free burgers: CLI is selling its prepared salads plant in Casteggio in exchange for a distribution agreement whereby CLI will distribute Zerbinati’s products in the regions where it operates. We believe the plant was loss making. At present we leave our sales forecasts unchanged as it will take time to leverage the increased product offering, but our labour costs fall. This results in a 2% and 6% increase in EBITDA for 2018 and 2019 respectively.
Our DCF model points to a fair value of €3.35 per share (previously €3.30), implying 16% upside. We calculate that for FY19e CLI now trades on a P/E of 34.0x and EV/EBITDA of 12.8x. On EV/EBITDA, CLI trades at a premium of c 55% to our peer group of dairy processors.