Russia bans cheese imports from a Milkiland plant

Rospotrebnadzor banned imports of cheese from three Ukrainian plants, including Milkiland’s (MLK PW) Mena Cheese, citing non-conformity with Russian quality standards. The three plants produce around half Russia’s total supplies of cheese from Ukraine. Rospotrebnadzor is Russia’s state service responsible for the protection of consumer rights.

Yegor Samusenko: The Mena Cheese plant is oriented almost completely to the Russian market and accounts for about 38% of Milkiland’s total cheese production capacity; we estimate it contributes around 21% of revenues and 30% of EBITDA. Following the ban, affected Ukrainian plants are expected to redirect to the domestic market and cut capacity utilization. This will likely push down domestic prices due to oversupply and harm profitability margins in the sector. This ban could also facilitate consolidation by Milkiland, which is cash-rich now following the attraction of USD 100 mln in debt in January for acquisitions. We expect Russia to lift the cheese import ban no earlier than March (after the presidential election) and potentially not until there is progress on the Russia-Ukraine dispute over gas prices. The ban clearly creates downside risk to our estimates of Milkiland’s 2012 financials, but as we expect only a short-term impact, we maintain our BUY recommendation.