Daily analyst comments

On Wednesday leader on the Russian beer market Baltika Brewery released its FY 2007 financials. According to the company, revenue climbed 29.5% y-o-y and topped EUR 2.25 bn. Robust earnings growth was achieved on the back of more than 19.3% rise in output and a 7.5% increase in the average selling prices in 2007. However, although revenue grew rapidly, high raw material expenses and distribution costs took a toll on Baltika’s margins.

Table 1. Baltika Brewery: FY 2007 Key financials (EUR mn)

	2006	2007	2007/2006
Revenue	1,739.5	2,252.9	29.5%
COGS	807.7	1,079.8	33.7%
Gross profit	931.8	1,173.2	25.9%
Gross profit margin	53.6%	52.1%
Distribution expenses	216.8	295.5	36.3%
Selling expenses	227.6	264.5	16.2%
Administrative expenses	62.4	75.8	21.5%
Operating profit	427.1	537.5	25.8%
Operating profit margin	24.6%	23.9%
EBITDA	555.8	668.4	20.3%
EBITDA margin	31.9%	29.7%
Net profit	330.9	399.2	20.6%
Net profit margin	19.0%	17.7%

Sources: Company data, Finam estimates

Overall, we are neutral on the company’s FY 2007 financials. On one hand, an efficient development strategy enabled the brewery to accumulate sales faster that average for the industry, with the market expanding at 15.7%. The company also managed to increase its market share to 37.6%, or up 1.2% on 2006, although competition was fierce. On the other hand, the company had to increase opex in order to encourage sales and roll out the distribution segment which took a toll on margins.

In our opinion, Baltika’s EUR 262 mn investments in 2007 which grew 3x for Samara-based production facilities, ongoing construction of the Novosibirsk-based plans and innovation marketing decisions are to help boost the company’s financials in FY 2008.

We have no formal recommendation on Baltika brewery.