Ukrproduct revenue falls, EBITDA rises in 1H14

Обзоры по компаниям и отраслям 25.09.2014 Ukrainian dairy producer Ukrproduct (UKR LN) reported a 31% yoy decline in net revenue to GBP 17.2 mln in 1H14, while its decline was 5% yoy in the local currency. Its core segment, branded products (cheese, butter and spreads), was the key decliner for the period: -41% yoy to GBP 11.3 mln (and -19% yoy in UAH terms). The company attributed the poor result to the oversupply of dairy products locally, prompted by Russia closing its market. At the same time, the Russian barriers also resulted in an excess supply of raw milk (the key input of Ukrproduct), which caused its price to decline to the benefit of milk processors. For this reason, the gross margin of Ukrproduct increased in all of its segments. Cheaper raw milk and devaluation of the local currency enabled Ukrproduct to boost sales of skimmed milk powder (SMP) for export markets. Its revenue in the SMP segment increased 36% yoy to GBP 4.7 mln and gross profit increased 4.8x yoy to GBP 1.3 mln in 1H14. With better input prices and higher sales in SMP segment, the company improved its EBITDA 42% yoy to GBP 1.84 mln (and nearly doubled it in UAH terms) in 1H14. At the same time, the local currency devaluation forced Ukrproduct to report GBP 2.8 mln in exchange losses, which resulted in a negative 1H14 bottom line at GBP 2.0 mln. Ukrproduct also reported it breached some covenants of an EBRD loan during the period. It did not disclose the nature of the breach, but explained that it has already obtained a loan waiver from the bank. It was able to decrease its total debt by GBP 3.1 mln in 1H14 to GBP 7.8 mln as of end-June. Alexander Paraschiy: Ukrproduct’s improved EBITDA is a positive surprise, given that its bigger peer Milkiland (MLK PW) reported a 7% yoy decline in EBITDA in its Ukrainian operations (in local currency terms). The current situation is beneficial for Ukrproduct, which is not a supplier to the Russian market and has large capacity for the production of export-oriented SMP. We expect the company’s financials in its core segment will continue to worsen in 2H14 due to an ongoing increase in competition on the Ukrainian dairy products market, while devaluation of the local currency will allow it to continue to benefit from a high margin in its SMP segment. All in all, we expect the company’s 2H14 EBITDA will be stronger yoy.