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Treasure Chest: CC Amatil Lacks Fizz

Treasure Chest | Jul 08 2019

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Subdued volume growth in Australian supermarkets persists for Coca-Cola Amatil. Brokers are of the view that valuation is stretched.

-Goldman Sachs concerned about sustainability of margins
-Investment in sales personnel to drive revenue in 2020
-A value-accretive acquisition could make a difference

 

By Eva Brocklehurst

Coca-Cola bottler Coca-Cola Amatil ((CCL)) has failed to impress brokers over recent months, despite managing costs well against reduced revenue growth.

Volumes remain subdued in Australian supermarkets, which brokers acknowledge may have been caused by the Queensland and NSW container deposit imposts, as well as a lack of consumer confidence surrounding the federal election. The implementation of a container deposit scheme in Western Australia next year, while unlikely to be material, could also be drag, Macquarie adds.

Australian earnings (EBIT) margins have declined since 2011. 2017 and 2018 margins included underlying cost savings of $45m and $35m, respectively, Goldman Sachs observes, and remains concerned about the sustainability of these margins in the absence of any further cost saving initiatives or a recovery in sales growth.

The broker acknowledges the success in New Zealand of creating more sales personnel to cater for the convenience channel, but there are notable differences between the company's market position in Australia versus New Zealand which may limit the potential. Compared with New Zealand there are a number of large, low-growth categories in Australia where Coca-Cola Amatil is under-represented, such as juice, dairy and alcohol.

Water and energy drinks remain high-growth categories in Australia but the company's 20-25% volume share is below its NZ category share. Bottlers are diversifying beyond carbonated soft drinks and Goldman Sachs believes the energy category presents an opportunity. Dairy is also a category where the company is attempting to improve penetration, leveraging the recently-acquired Rockeby Farms and the launch of Nutriboost.

Cost reductions have stemmed earnings declines during periods of weak revenue growth in recent years, Goldman Sachs notes, and the business is now relying on improved sales trends. Still the broker is cautious about the near-term growth potential. UBS assesses, on current trading, growth in mid single digits in 2020 and beyond is reasonable, noting 2019 is the second year of a two-year transition.

SPC

The company has completed the sale of the SPC fruit and vegetable processing, now enabling a focus on the core business. Given Coca-Cola Amatil had effectively written down the value to zero the expected profit on the sale of $10-15m was better than Deutsche Bank expected.

Indonesia

The company achieved double-digit volume growth in the March quarter in Indonesia, although Macquarie points out this is attributable to cycling undemanding comparables and there was no boost to sales from the April election. The company has guided to around 5% earnings margin in Indonesia, similar to 2018.

Indonesia may be expected to improve volume growth but this is through the benefit of price reinvestment and Goldman Sachs suspects double-digit growth rates will be unlikely until FY20. That said, the rate of growth is still expected to be higher than the company's core markets in Australasia, as it is a developing market with an average population that is significantly younger.

Growth targets in other regions are expected to be achieved in line with the value proposition but the stock remains at the relatively expensive end of the broker's coverage in relation to global bottlers. A value-accretive acquisition could make a difference, particularly with products that aid in the longer-term development of the company's "Beverages for Life" strategy.

This strategy includes the change of product mix away from carbonated soft drinks. Goldman Sachs, not one of the eight monitored daily on the FNArena database, downgrades to Sell, finding it difficult to justify the current valuation. Target is $8.50, calculated to offer a total return of -14.5%.

Credit Suisse recently downgraded to Underperform from Neutral, and Macquarie downgraded to Underperform in May. Macquarie suggests there are a number of headwinds facing the business and returns and operating expenditure in Australian beverages are uncertain. Moreover, more expenditure is likely to be needed to meet growth targets.

Credit Suisse accepts the sales force investment will drive revenue in 2020, and a -3% decline in Australian earnings, partly affected by the investment in the sales force, is already incorporated into estimates. The broker calculates, even assuming the PE is sustainable, on 2021 estimates there is only 3% potential upside to the share price.

FNArena's database shows four Hold ratings and four Sell. The consensus target is $8.36, signalling -18.9% downside to the last share price. Targets range from $7.70 (UBS) to $9.00 (Morgan Stanley). The dividend yield on FY19 and FY20 forecasts is 4.4%.

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