Coca-Cola Amatil Ltd(ASX:CCL) reported a disappointing full year of 2014 results, with the total trading revenue falling by 1.9% to $4,942.8 million during 2014 from $5,036.4 million in 2013. The decline was mainly due to the pressure from its Australian business, with revenues posting a decrease of 3.9% on a year over year basis to $488 million. Meanwhile the total earnings before interest and tax declined by 21.8% yoy to $651.5 million, impacted by year over year decrease from Australia and Indonesia &PNG segments by 21.3% and 65.2% respectively. Consequently the group’s net profit after tax (before significant items) reduced 25.3% to $375.5 million, as compared to 2013. The reported net profit after tax plunged 240.6% post the impact of significant items. The group has undertaken aggressive restructuring program to revamp its business, and have spent $85.9 million for restructuring the Australian beverage business and $17.5 million to restructure activities in other businesses. Therefore, the total significant items expense reached $103.4 million after tax.
Coca-Cola Amatil derives 85.9% of the revenues from non-alcoholic beverages. Australia represents 66.7% of revenues for non-alcoholic beverages while Indonesia represents 21.8%. However, investors need to note that the group’s Australian beverage business have been under pressure, with the earnings decreasing by 21.3% on a year over year basis. Although CCL has undertaken restructuring activities to revamp its market position,
Australian beverage business is a mature market, and given the competitive environment, increasing CCL’s market share further can be challenging.
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Coca-Cola Amatil segment breakup (Source: Company reports)
Moreover, CCL’s Australian nonalcoholic beverages volumes have fell by 0.9% yoy in 2014 on the back of changing consumers’ preferences over traditional soft drinks to a more healthy substitutes with less sugar and calories. On the other hand, the group has increased its share in sports drinks by over four points boosted by solid marketing. The energy drink share also rose by 5.5 points but the rapidly growing water category witnessed a one point decline. However, the firm’s share in alternate segments is relatively small and will not be able to offset the decline coming from the soft drinks business.
Meanwhile, to offset the pressure coming from the Australian business, the group has focused on the rapidly growing Indonesian market, and accordingly the volumes rose by 17.6% on a year over year basis to 210.1 million unit cases in 2014. To further strengthen its presence in Indonesia, the parent company, The Coca-Cola Company will be investing over USD 500 million in Indonesia, by holding 29.4% equity interest in CCA Indonesia.
The shares of Coca-Cola Amatil fell 15.1% over the last three months partly attributed to the rumors of the potential decrease of the group’s supermarket prices. Although such a move will help CCL to increase its market share, its profit margins will come under pressure. Moreover, the expansion efforts at CCA Indonesia will take another four to five years to offset the decline of its Australian business as CCA Indonesia expects to self-sustain its growth from operating cash flow by 2020.The weakening Rupiah, rising wages and competition might also delay the Indonesian growth and its ability to generate positive cash flow. Coca-Cola Amatil also decreased its dividend per share to 42 cents per share (payout of 85.4% of net profit before significant items) as compared to 58.5 cents in 2013, adding more pressure to investors. The group expects to incur a capital expenditure of over $330 million per annum for the next three years.
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Earnings and dividends performance over the years (Source: Company Reports)
On the other hand the management said that the EPS will not decrease post 2014 and intends to maintain the dividend payout ratio above 80% depending on the cash flow generation. CCA also want to improve its efficiency and intends to achieve a cost saving of $100 million for the next three years, and reinvest this amount for marketing initiatives.
Coca - Cola Daily Chart (source - Thomson Reuters)
However, with the group’s first half results due next month, we believe it is better for investors to be away from CCL given such a challenging environment in Australia and hazy outlook on the group’s potential Indonesia traction. The stock delivered a negative year to date returns of 1.6% as compared to the broader S&P /ASX 200 returns of 4.8% and we believe that the shares will witness more pressure going forward. Being a single digit revenue growth company, we think that the stock’s P/E of 25.73x is also trading at a slightly higher value as compared to its industry peers.
Based on the foregoing, we give an “
Expensive” recommendation to the stock at the current levels of $9.05.
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