Parmalat faces milk cost, volume risks in 2008
By Sabina Suzzi
MILAN, May 22 (Reuters) - Italian dairy firm Parmalat's main challenges this year are higher raw milk costs and lower sales volumes, analysts say, after having already hurt first-quarter profit in a worsening consumption scenario.
While legal cases brought by Italy's biggest listed food company over its 2003 collapse are bringing some funds, the market is cautiously looking at its core business which could be hurt by market turmoil and rising raw material costs.
These have already affected Parmalat's performance in Australia and Italy.
Parmalat reported an 18 percent drop in first-quarter net profit to 90.2 million euros ($142.2 million) due to the higher cost of raw materials and higher production and marketing expenses, sending its shares to their lowest level since the group's 2005 relaunch.
It forecast earnings before interest, tax, depreciation and amortisation would grow 7 percent this year, at the low end of a 7-10 percent range it had given.
"(We) see it taking some time for the market to regain confidence in the business dynamics," Lehman Brothers said in a note.
On its domestic market, Parmalat -- known for its long-life milk -- is facing stiff competition from private labels as well as the loss of consumers who are moving away from well-known brands to those that cost less.
Santander analyst Andrea Paladini cited a "fly to cheap" approach among local consumers.
When it reported its results last week, Parmalat said virtually all its markets were facing strong competition, affecting sales volumes and prices. It also noted euro strength against currencies in Canada and South Africa where it operates.
The company, which relisted in 2005 after a 14 billion euro debt meltdown, has raised prices and says it will take measures involving production costs and sales to "recover profitability".
"The risks we envisaged ... concerning the high elasticity of milk prices materialised with first quarter results and were exacerbated by the weak consumption trend in Italy and strong competition in Australia," Banca Imi said in a note.
"Going forward, this trend may also characterise the coming quarters."
Despite noting market scepticism about the prospect of creating value from acquisitions, analysts are watching closely how Parmalat fares in its bidding for Australia's Dairy Farmers.
It has sought regulatory clearance to make a bid and media reports have put an offer at around 400 million-500 million euros.
"The acquisition may allow it to strongly increase its size in Australia, improving its bargaining power both with farmers and the trade," Banca Imi said.
Parmalat has sued several banks that worked with previous management over its collapse. Citigroup (C.N) is the first defendant to go on trial in the United States over accusations of helping conceal corrupt activity by former Parmalat lenders.
Attorneys for Citigroup said the bank was a victim of Parmalat's fraud and is pursuing its own claims, saying it lost almost $700 million when Parmalat went bankrupt.
(Editing by Rory Channing)
