Company Overview: Coca-Cola Amatil Limited (CCA) manufactures, distributes and sells ready-to-drink beverages in the Asia-Pacific region. The Company's segments include Non-Alcohol Beverages; Alcohol & Coffee Beverages, and Corporate, Food & Services. The Company manufactures Coca-Cola products in approximately six countries in which it operates. The Company's businesses include Australian Beverages, Indonesia & PNG, New Zealand & Fiji, Alcohol & Coffee and SPC Ardmona. The Non-Alcohol Beverages segment is engaged in the manufacture, distribution and marketing of sparkling drinks and other non-alcohol beverages. The Alcohol & Coffee Beverages segment manufactures and distributes spirits, beer and coffee products. The Corporate, Food & Services segment is engaged in the processing and marketing of fruit and other food products business (SPC), and the provision of certain support services to the Company and third party customers business.


CCL Details

Despite some softness in first half of FY17, the company finished 2017 that was almost in line with its guidance and the trend improved materially in 2H. The key drivers include Australian beverage business that showed an improvement in volume trends. The Group remains committed to delivery of mid-single-digit EPS growth over the medium term. The challenges appear obvious but given the strong balance sheet and low trading levels relative to its global bottler peers, the stock seems to be well positioned for upside momentum.
 

FY17 Segment-wise Result (Source: Company Reports)
 
Decent Financial Performance for 2017: It recently announced its full year results for 2017 and delivered underlying net profit after tax (NPAT) of $416.2 million (down 0.4%) and this is broadly in line with previous year and in line with the guidance provided in April 2017. Underlying EBIT of $678.7 million was down by 0.7 per cent while underlying earnings per share (EPS) increased by 2.2 per cent, with statutory EPS up 85.7 per cent. It is worth noting that CCL’s statutory earnings before interest and tax (EBIT) of $678.4 million was up 45.5 per cent, and statutory NPAT of $445.2 million was up 80.9 per cent. At the back of this performance, final dividend of 26.0 cents per share was up against 2H16 figure of 25.0 cents per share, franked to 70 per cent. This also represented an underlying pay-out ratio of 82.4 per cent for the full year. CCL’s New Zealand and Fiji segment performed strongly again and delivered 15 per cent of the Group’s underlying EBIT. Indonesia and Papua New Guinea delivered another very strong earning results with a growth of 30.6 per cent and Alcohol Coffee delivered 11.2 per cent of growth that was in line with its shareholders value proposition. The Group also completed the share buy-back program and acquired 39.6 million of shares at an average price of $8.84 per share during the year. However, net debt increased by $344.4 million and amounted to $1.3 billion. On the other hand, sale of Richlands facility in Queensland that was settled in early December 2017 resulted in proceeds of $156 million giving one-off gains of $101 million before and after tax in 2H17 (due to the utilisation of capital losses).
 

Net Debt Performance (Source: Company Reports)
 
Performance of Australian Beverages: Revenue, volume and EBIT trajectory improved in the second half as many of its initiatives gained traction, but this was not sufficient to offset the challenges the Group experienced at the start of the year where performance was adversely impacted by the competitive pressure in the cola and water categories. Trading revenue per unit case was 0.9% lower as compared to 2016 and comprised of 0.8% increase from container deposit scheme pricing, 1.3% of reduction in realised price and 0.4% reduction from product/channel mix. On the other hand, savings were generated from cost optimisation program and were reinvested in rebalancing of the portfolio through innovation with a refocus on sales efforts and on price investment. Further, initiatives implemented during the year resulted in improved performance for sparkling and still beverages in the second half. The group also witnessed improvements in revenue and volume in Grocery and Petrol & Convenience in the second half.
 

Australian Beverages’ Performance (Source: Company Reports)
 
Positive Outlook for 2018: CCL moves forward in 2018 with the $40 million reinvestment against Accelerated Growth Plan. This investment, along with the uncertain impact of container deposit schemes will negatively impact Australian Beverages, and consequently, Group near-term earnings. In medium term, CCL continues to target mid-single digit EPS growth that will be in line with its shareholders value proposition. Its level of performance will depend on the success of revenue initiatives in Australia, Indonesia economic factors and regulatory conditions in each of its markets.

Shareholder value creation: With efforts on revenue growth plan, working capital management, bolt-on acquisitions, and growth capex for developed markets, CCL expects to deliver mid-single-digit EPS growth (as indicated above) with dividends having above 80% pay-out ratio and strong return on capital employed.
 

Progress on value creation (Source: Company Reports)
 
Growth Strategy Options: An additional growth was witnessed in its business and the group launched new brands and channels. It extended its market to new geographies and reported potential acquisitions and explored additional opportunities and technologies which will target customer and consumer needs. Its Accelerated Australian Growth Plan focuses on stabilising the core and targets the growth areas and delivers an improved execution in existing and in new channels. Since November, it has made a good progress against its plans. It launched Coca-Cola Raspberry and also heritage packs in RECA and the roll-out of Keri Juice Blenders continued. It has been successful in identifying and delivering its cost optimisation initiatives and is accelerating the closure of Thebarton to the end of 2018.
 

Cost Optimisation Strategy (Source: Company Reports)
 
Sustainability and opportunities: Human Rights Policy was introduced across the Group and there was a 73% of reduction in injuries since 2012 while there was an increase of 11% in hazards since 2016. It has invested $1.1M in the Coca-Cola Australian Foundation with Coca-Cola South Pacific and aspires to invest an equivalent of 1% of its EBIT across the Group. It commits to deliver 25% of carbon reduction for the NARTD that is “drink in your hand”. 2018 Group capex is expected to be around $400M which reflects initiatives to drive growth in Australian Beverages and also a continued investment in Indonesia. It is pursuing additional opportunities within its Property Division with an anticipation that may result in additional one-off gains in 2018 which can offset the one-off costs.

Changes in the Management: CCL appointed Ms Julie Coates as its Non-Executive Director who will take responsibilities effectively from 1 March 2018. The new director has an outstanding record in leading major retail and FMCG operations and in establishing highly motivated and successful teams.  Peter McLoughlin as the Managing Director of Australian Beverages stepped down from his position and took an extended period of sick leave and Mr Peter West was then appointed as the Managing Director. Group’s Financial Officer Martyn Roberts was appointed as the interim Managing Director of Australian Beverages. Mr Paul Cooke, who was Group’s General Managing Financial Planning and Control Officer was appointed as Group’s interim Chief Financial Officer till April 2018.

Stock Performance: CCL’s share price surged up by 9.7% over the period of six months and by 4.6% in the past one week as on February 23, 2018 at the back of the decent result. CCL was down about 3% on February 26, 2018 as the stock traded ex-dividend. At the back of the result, group’s EPS has been increasing over time and ROE for 2016 was 12.3% and this surged up in 2017 to 25.6%. The group’s segments are witnessing improvements, and this includes continued EBIT growth in Indonesia and in Papua New Guinea. Further, strong performance in Indonesia has increased non-controlling interests. CCL aims to leverage and extend brands and capabilities (like the route-to market) while building and adding new brands and channels and is extending Amatil brands and capabilities to new geographies with potential acquisitions. It is trading on a 12-month forward P/E ratio of 15.13x. As far as the returns are concerned, these improved in 2017 as compared with 2016, driven by reduction of the capital employed. Looking at the long-term prospects, we recommend to “buy” the stock at the current market price of $8.79
 

CCL Daily Chart (Source: Thomson Reuters)

 
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