Rusagro could become Russia's largest dairy producer with $1bn investment

By bne IntelliNews February 28, 2017

Russian agricultural giant Rusagro stands to become the country's largest dairy producer with a planned investment of $1bn, Vedomosti reported on February 28, citing an announcement by the company's main owner Vadim Moshkovich at the Russian Investment Forum on Sochi.

Rusagro reportedly sees high potential in exporting dairy to the Asian-Pacific region, notably China, South Korea and Japan, and major investment in the segment will be brought to the board's consideration by the end of 2017.

Recently the company pulled out of a mostly domestic-oriented RUB24bn (€390mn) investment in greenhouse development, citing insufficient government support despite the announced import-substitution drive in agriculture.

Analysts surveyed by Vedomosti estimated that a $1bn investment would translate into about 0.5-0.6mn tonnes of milk produced annually, making Rusagro the largest producer of raw milk in Russia. Currently the market leaders Tkachev Agrokompleks and Ekoniva are producing about 0.2mn tonnes of raw milk annually.

Russia's Far East is also seen as a good base for such production as the region itself only supplies about 40% (0.5mn tonnes) of its own milk, while the geographic proximity makes it a good resource base for Asian exports. China alone imported about 9.5-10mn tonnes of dairy products in 2016.

However, only Russian ice cream is currfently allowed to be imported to China, with the rest of dairy products needing special clearance from the veterinary services, still to be obtained.

"Development of the Primorsk milk cluster would be the company’s fourth area of business development in addition to pig farming (an emerging area), an operating oil and fat business, as well as cultivation of corn and soya," Gazprombank comments on February 28.

Rusagro already develops large-scale projecs in the Far East, such as Primorsk Bacon factory worth RUB60bn and planned output of 0.3mn tonnes of pork annually.

Another project is Primorsk Soy with processing capacity of 0.15mn tonnes of soy beans annually and with most of the soy oil sold in China and South Korea. The company also manages about 80,000ha of farmlands in the region, mostly raising corn sold to Japan.

Gazprombank is "positive, overall" about the company’s plans to expand its Far East cluster into dairy production, seeing the key risks as lack of sales channels outside the domestic market.
"The company’s plans are long-term in nature and unlikely to have much of an impact on investors," Gazprombank said, noting that at this stage the Primorsk milk production plans are not included in Rosagro’s investment case.


Meanwhile, the $1bn investment substantially exceeds the $300mn investment planned for 2017 that was previously announced by Rusagro.

The company also reported disappointing third quarter results with IFRS Ebitda falling 47% year-on-year to RUB3.4bn and missing the RUB3.6bn market consensus.

Revenues in the third quarter of 2016 declined by 2% y/y to RUB17.6bn, with Ebitda margin dropped 16pp y/y to 20%. The decline in Ebitda was attributed to the sugar and meat segments, with Ebitda margin down by 13pp to 22% and by 23pp to 27%, respectively.

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