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.