Despite the challenging economic and political environment in Italy during Q118, Centrale del Latte d’Italia’s (CLI) price increases, implemented mostly during Q217, continued to drive revenue growth. We should see the effect of this subside during Q218 as we start to cycle a full year of price increases. Vegetable-based drinks and the export business continued to witness excellent growth, albeit from a low base. At this early stage, we leave our FY18 forecasts unchanged, and our fair value remains at €3.30 per share.
Price increases were implemented on 1 April 2017 to offset some cost inflation and were fully rolled out on 1 June 2017, so we should see the effects of these subside during Q218 as we lap the price increases. Q118 organic growth continued to be impressive at 5.1%, with EBITDA margin of 3.8%. Raw materials remain a challenge, with liquid milk prices now softening somewhat, but butter and cream prices are still rising. For FY18, we forecast 0.5% revenue growth and EBITDA margins up 30bp to 4.2% – unchanged from our previous estimates.
We note there was a divergence of performance across CLI’s categories: fresh milk has stabilised, while UHT milk continued to decline amid strong promotional activity by the competition. The yogurt segment and prepared salads witnessed the greatest declines as competition remained tough in the former, and a tough economic backdrop affected consumption of the latter. Bulk milk and cream is a byproduct of dairy processing and is mostly influenced by seasonal supply and demand. Other prepared products continued to do well, as more lines were added to the jarred ready-prepared sauces and vegetables. Raw materials were also a mixed picture, with raw milk costs starting to decline slightly, while butter and cream prices remained firm.
Our DCF model points to a fair value of €3.30 per share (unchanged), implying that the stock is fairly valued. We calculate that for FY19e CLI now trades on a P/E of 50.4x and EV/EBITDA of 13.0x. The P/E is inflated in part due to the high interest costs as a result of the elevated level of debt in the short term associated with the merger by incorporation with CLF in September 2016. On EV/EBITDA, CLI trades at a premium of c 40% to our peer group of dairy processors. Our EPS forecasts move up 6% and 2% for FY18 and FY19 respectively on the back of a lower dividend forecast, but our underlying forecasts remain unchanged.