Research Notes

Wimm-Bill-Dann, one of the biggest food producers listed on the Russian stock market, continues to demonstrate high growth in sales and financial indicators, which, amid surging raw material prices, once again underscores efficient work performed by the company’s new management team.

Since our previous revision of the company’s stock recommendation in mid-April 2007 Wimm-Bill-Dann has climbed over 20%. In accordance with the financial statement released by the dairy giant for the first half of 2007, and also taking into consideration the company’s updated guidance for sales and margins in 2007, we updated our target prices for the company’s securities.

In our opinion, Wimm-Bill-Dann stocks are already fairly valued by the market and our year-end 2008 fair price for the company’s stocks is $90.90, which implies 10.2% upside potential to the current stock valuations. We assign a Hold recommendation to Wimm-Bill-Dann common shares.

Wimm-Bill-Dann’s first-half financial report showed a 40.5% spike in revenue and a 40.9% upsurge in net profit compared to the year-earlier period primarily on a hike in average selling prices for its products and also higher sales volumes in all segments.

In our valuation model, we upgraded our forecast for Wimm-Bill-Dann’s sales in 2007 and subsequent years in view of a more dynamic rise in average selling product prices and stronger sales in the dairy segment.

Despite the fast pace of growth in raw material prices, i.e. raw milk and juice concentrates, the company managed to improve gross margin in all segments (32.9%), while gross margin in the beverages segment grew more than 7% to 40.8%. Be that as it may, we expect to see raw material prices go up further in the second half of 2007 and, consequently, we cut our forecast for the company’s 2007 gross margin to 32.8% from 33.2% in the same period a year ago.

Management’s statements about hurdles in the achievement of the previous targets of raising EBITDA margin to 14% in 2007 and H107 indicators prompted us to revise our forecasts upward for the company’s opex and margins. However, management is determined to deliver on its previous plan to double sales in 2010 and upgraded revenue guidance from $3.5 bln to $4 bln.

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Sergey Filchenkov

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