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Why we sold this dividend stock ?

October 13, 2014 | Team Kalkine
Why we sold this dividend stock ?

Stock of the Day – Coca-Cola Amatil Limited (SELL)

Coca-Cola Amatil Limited (CCA) is one stock that is caught between a rock and a hard place with a sinking consumer confidence, in our view.

CCA’s EBIT declined by 15.3%, which was in coherence with guidance provided on 11 April 2014. 


Profit and Loss (Source – Company Reports)

As per the Company’s 2014 interim result overview, CCA is sailing in grim trading conditions in Australia that led a 14.1% decline in Australian beverage earnings. 


Australia Performance Results (Source – Company Reports)

There has been a 6% volume decline in operational accounts due to move to national account chains and quick service restaurants, lowering of salesforce and outlet call frequency, and low promotional activity. Promotional activity in the grocery channel also yielded poor results. Sports and Energy drinks share were up 3.6 points and 6.4 points, respectively, due to factors such as product innovation and so forth.

CCA reported that earnings for New Zealand & Fiji increased by 12.0% in Australian dollars. A decline in earnings was seen in alcoholic beverage segment though. 


New Zealand and Fiji Performance Results (Source – Company Reports)

In New Zealand, second quarter yielded better results to counterbalance the flat local currency earnings result and decline in volumes of first quarter. Categories such as juice, water and energy did well. Petroleum channel volume grew by >13%. There was a decline in Grocery volumes in effect from the soft trading scenario in the carbonated beverage category.

In Fiji, the stable economic sentiments drove healthy volume and earnings growth.
The Company’s Indonesian business yielded healthy volume growth and market share gains. However, the factors that influenced earnings were cost inflation, currency depreciation and amplified competition. 


Indonesia & PNG Performance Results (Source – Company Reports)

For the Indonesia business, a new sharing arrangement with the Coca-Cola Company may help positively impact the cash flow. This may be up for discussion ahead of the upcoming Investor Day. It appears that CCA has negative cash flows in Indonesia while TCCC may be generating some positive cash flow. Prima facie, recovery in Indonesia’s Coke market can take lead in determining the economic profits between the two companies.

CCA’s management has identified the need for doubling the Indonesia volume before 2020 when TCCC is coming-up with its own strategic plan. This is only realizable if CCA’s average realized price outgrows inflation. But the question here is – whether CCA can steer through and have positive cash flows in near future.
Earnings for Alcohol, Food & Services went up by 4.5% in view of improvement in SPC Ardmona results. CCA’s Capital Expenditure reduced in view of completion of investment in PET bottle self- manufacture lines in Australia.


Capital Expenditure (Source – Company Reports)

CCA’s free cash flow went up to $125.9m owing to the better working capital and lower CAPEX. The cash flow generation helped the Company lower down the net debt. Better balance sheet and financial ratios indicated an interim ordinary dividend payout ratio of 83.8%. This is above the 70- 80% target payout ratio.


Net Debt (Source – Company Reports)

As per the 2H14 outlook, CCA expects better grocery comparatives in Australia. It aims to finish the year with lower levels of inventory in the trade. In Indonesia, the Company will continue to have strong volume growth. CCA expects to have low full year earnings. All in all, the Company expects materially low earnings than 2013.


CCL Daily Chart (Source - Thomson Reuters)

For strategic footprint in Australia, CCA has reported to put efforts to serve in alignment with changing consumer preferences; increasing sugar aversion from health concerns and anti-sugar activism point of view; consolidating retail environments; optimizing revenue management model; re-designing the route-to-market model; and combatting increased competition. For example, the Company illustrates that re-designing model may entail selling and logistics model optimization, and price/promotional strategy review, and the like.

Most importantly, the changing mindset that considers Coke as an unhealthy drink poses the biggest threat to the Company for which beverages is the utmost important segment. This is in support of a recent report that indicates a decline from 56% to 49% in soft drink consumption in Australia (five years up to Dec 2013). The Company has no competitive edge for some of its products such as the water range. Overall, we see a weak consumer confidence; and are not fully poised with CCA’s efforts in strengthening its engagement with TCCC for products such as Coca-Cola Life that contains less calories than the regular Coca-Cola, which tend to become consumer’s choice.

It thus appears that the Company may take some time to walk the talk. Accordingly, we put a SELLrecommendation for the stock at the current price of $8.67.

 

 
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