OREANDA-NEWS. December 01, 2009. Raw milk prices increased by more than 20% in November from their summer levels, according to Kommersant. The key reasons for this are the very low raw milk prices during the high season, the fact that dairy producers failed to produce sufficient stock of dry milk in the summer, and the ban on dry milk imports from Belarus, reported the press-centre of OTKRITIE Financial Corporation.

View: We believe this news is neutral for WBD, but that it could be marginally negative for the dairy industry as a whole. Raw milk prices are seasonally higher in late autumn and early winter, and dairy producers usually record lower gross margins in 4Q and 1Q. This year the summer-to-autumn rise in raw milk prices is higher than the usual increase of 10-15%. However, we believe that WBD will not see a drastic squeeze on its 4Q09 gross margin due to the following reasons: 1) it has favorable terms in its contracts with milk suppliers; 2) due to successful marketing efforts, its sales mix is improving in favor of high value-added products.

Valuation: WBD trades at a 2009E EV/EBITDA of 10.3x, which is 5% premium to EM peers.

Action: We reiterate our HOLD rating for the stock.