Australia | Nov 18 2019
Coca-Cola Amatil expects a return to growth in 2020 with both channel and product mix providing positive impetus to revenue.
-Improving revenue trends in Coca-Cola trademarked product
-Indonesia still challenging although Coca-Cola Amatil well-positioned
-Value-added dairy and energy drinks the two opportunities in NZ
By Eva Brocklehurst
Coca-Cola Amatil ((CCL)) anticipates a return to growth in 2020, emerging from a transition period and renewing its focus on the top line. As cost savings diminish, revenue growth will become more important. Low single-digit growth in Australian beverages has eluded the company for several years but this should change from 2020. Growth in sparkling categories is expected to return, led by Coke.
There are improving revenue trends being seen for the Coca-Cola trademark, while merchandising and promotions in Australia have been revamped. The company is taking back control of merchandising in Australian supermarkets and this is expected to be critical for in-store execution.
Citi assesses the company's targets require low single-digit earnings growth in Australia and double-digit growth in Indonesia, PNG, coffee and alcohol while both channel and product mix should be positive for revenue per case and earnings.
UBS has become less negative about the stock in the wake of the update but retains a Sell rating on valuation grounds. The broker increases estimates for earnings per share by 1% to reflect higher Australian beverages volume growth in 2020 and a large skew in profit to the second half. Ord Minnett is more confident, finding the valuation more attractive versus the large Australian consumer staple peers.
The main driver of the better outlook is lower costs, which Citi calculates could add 4-5% to growth in earnings per share in 2020. Costs are expected to fall -5% in Australia and -6% in Indonesia. The main costs include sugar, aluminium and PET resin which are inherently volatile, although only represent 20% of the cost of goods sold. Yet reduced costs should provide at least a $25m tailwind, in the broker's estimates.
Citi remains concerned that revenue growth will still be sluggish in key markets, forecasting growth in earnings per share of 3% in 2021 and just 1% in 2022. The broker also calculates, as the stock has recovered over the past year and now trades at 19x 2020 PE (price/earnings) estimates, a 16x PE is more appropriate given the benefit from lower commodity costs is a one-off.
UBS estimates the company has spent more than $120m over the last three years reinvesting in its Australian beverages business. Although top-line trends have started to improve the broker suspects further investment will be required. To become more positive UBS would need to witness a sustained pay-back of this investment in terms of volume growth and stable margins.
As cost reduction programs are largely complete, Macquarie upgrades to Neutral from Underperform. While Australia has returned to growth and New Zealand is outperforming, the broker notes Indonesia remains challenging.
Citi points out Coca-Cola Amatil has begun repatriating cash from both Indonesia and PNG, totalling around $243m of the almost $900m that is stranded in these countries. The broker suspects the put option on the Indonesian stake from The Coca-Cola Company will not be exercised in 2023 as Indonesia will not meet its target. Returns on invested capital (ROIC) will be well below the weighted average cost of capital (WACC).
Ord Minnett notes, while a slowdown is occurring at the consumer level in Indonesia the beverages industry is still performing well and Coca-Cola Amatil is positioned for both revenue and earnings growth. The company has indicated it may be logical down the track to add other markets to its Indonesian franchise such as the Philippines, Singapore, Malaysia and Laos.
The Australian container deposit scheme is now embedded in base estimates which should help comparable sales, Macquarie points out. New Zealand is less reliant on the Coke brand or water and value-added dairy & energy drinks remain two key opportunities the broker envisages could provide growth in the region. The main risk ahead is the implementation of an NZ container deposit scheme in 2022.
FNArena's database has one Buy (Ord Minnett), two Hold and three Sell. Targets range from $9.10 (UBS) to $11.50 (Ord Minnett). The consensus target is $10.14, suggesting -7.0% downside to the last share price. This compares with $9.54 ahead of the company's update and with several brokers yet to comment on the briefing. The dividend yield on 2019 and 2020 forecasts is 4.5% and 4.4% respectively.
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