Milkiland 1Q13 sales rise 5%, profit halves yoy

Ukraine’s leading cheese producer Milkiland (MLK PW) reported a 5% yoy increase in its 1Q13 revenue to EUR 71.1 mln. The growth was driven by a 26% yoy rise in its whole-milk products (WMP) segment, which reached EUR 35.2 mln to become the company’s leading business unit. Sales in its core segment, cheese and butter, fell 14% yoy to EUR 29.8 mln, which the company said was the result of a “shortage of afforbale milk,” as well as a decrease in cheese exports to Russia.

The WMP segment was a key contributor to the company’s EBITDA as its operating profit jumped 64% yoy to EUR 3.1 mln. This growth, however, was offset by a 33% drop in operating profit of its cheese and butter segment (to EUR 3.2 mln), which made total EBITDA drop 4% yoy to EUR 6.7 mln.

The smaller EBITDA, EUR 0.4 mln in foreign exchnage losses and a more-than-doubled income tax expense led the company report a 47% yoy decline in net profit to EUR 0.98 mln.

In its operational update, Mikiland reported on the launch of its Polish Ostrowia plant in February 2013, which has yet to reach its full capacity. The company said the costs to launch the plant, reflected in its 1Q13 financials, amounted to EUR 0.9 mln (44% of Ostrowia’s 1Q13 revenue), which contributed to a negative 13% EBITDA margin at Ostrowia. The company also reported the acquisition of a small dairy, Syrodel, in Russia’s Kursk region.

Alexander Paraschiy: The company explained its EBITDA decline by citing higher milk input prices, and we see the situation will improve in the coming quarters. Firstly, prices will seasonally decline on higher milk production in Ukraine. Secondly, the company is working to improve self-sufficiency in its milk segment: it reportedly raised milk production 10% yoy in 1Q13, with a chance to double it in the coming quarters after it commissions the first stage of its new dairy farm (planned for 2Q13). That will increase Milkiland’s own milk intake to about 10% by 3Q13, we estimate, vs. just 4% reported in 1Q13. All in all, we see Milkiland has all the chances to significantly improve its financials in the coming quarters and show a yoy increase in profits.

The key cause for concern in the 1Q13 report is the decline in cheese production and exports to Russia, a phenomemon that we cannot explain so far. At least, it suggests that Russia remains a risky market for the company, even though the “cheese war” that affected Milkiland’s 2012 sales is over, or seemingly so.