Milkiland reports financial results for 9m 2015 a light in(or) the end?

Total revenues in EUR terms declined by 35% vs. 9m 2014 to EUR 146.2M, driven by import ban on Ukrainian and EU dairy production imposed by Russian government since mid-2014 and devaluation of both countries national currencies. On the top of it balance sheet structure significantly worsened in a view of devaluation and write-off of part of cash placed in Ukrainian Professional Bank (EUR 8.3M). Despite this fact current assets structure can still remain the point of concern in a view of presence of significant portion of Intragroup items, which finally can appear as doubtful. Also important issue is ongoing process of bank debt restructuring.

Ban on export of cheese in Russia, which, basing on our estimations, in Y2013 made close to EUR 70.0M, had significant impact on revenues of the company. Also these operations were the most profitable for Milkiland, so mentioned ban made significant negative impact on profitability. To mitigate impact of Russian ban, the group started to focus on domestic realization WMP products in Russia and Cheese&Butter sales in Ukraine. According to report in 9m 2015 Russian WMP realization in natural terms grew by 22% (vs. 9m 2014), while sales (in natural terms) on Ukrainian market increased by 18%. Such results were offset by devaluation of RUR and UAH, despite of some growth of prices in local currencies, decrease of EUR-denominated price in Russia made 25%, in Ukraine by 16%. So, total sales volume in Russia made EUR 86.2M in 9m 2015 (59% of total), in Ukraine EUR 43.2M (30%).

Weak world prices for dairy production put additional pressure on operations of the company. Profitability of operations further declined in 9m2015 EBITDA was reported at EUR 9.5M vs. EUR 18.1M in corresponding period of previous year (but sufficient to cover interest expenses). According to report, Russian WMP (mainly) operations accounted for about 75% of total EBITDA volumes, while Ukrainian realization was far less profitable.

On assets side we already mentioned cash deposit write-off in amount of EUR 8.3M, as deposit was placed in Ukrainian Professional Bank, which is highly negative as actually it can mean cash wash-out, generally companies of similar to Milkiland scale of operations are not supposed to place cash deposits in such an amount in low-rated banks. On risk side here is presence as of 30/09/15 of additional Intragroup items at close to EUR 17.0M value, which quality can be seen as questionable, taking into account already occurred write-off. If we adjust Equity of the Company by this amount, remaining BV of the company is close to EUR 30.0M (assuming current fixed assets value is fair, which is also questionable at the moment). Bank debt burden as of 30/09/15 was at EUR 105.5M, almost for a year the company has been in restructuring process with financing banks, so further situation will be highly dependent on results of this restructuring.

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