Company Overview - Coca-Cola Amatil Limited (CCA) is the bottlers of non-alcoholic ready-to-drink beverages in the Asia-Pacific region. The Company business comprises of: Non-Alcohol Beverages, and Alcohol, Food and Services. The Non-Alcohol Beverages business is categorized into three geographic regions: Australia, New Zealand and Fiji, and Indonesia and Papua New Guinea (PNG). The Company's diversified portfolio of products include carbonated soft drinks, spring water, sports and energy drinks, fruit juices, iced tea, flavored milk, coffee, tea and SPC Ardmona, and Goulburn Valley packaged ready-to-eat fruit and vegetable snacks and products. CCA sells and distributes a range of Beam Global premium spirits, including Jim Beam, Canadian Club, Makers Mark and The Macallan. It also manufactures and distributes the ready-to-drink alcoholic beverage, Jim Beam & Cola.


First Half of 2015 Results Update and Outlook
 

• Better than Expected First Half of 2015 results: Coca-Cola Amatil Ltd (ASX: CCL) reported better than expected first half of 2015 results, with the trading revenues surging by 4.9% on a year over year basis to $2.4 billion. The group’s Australian business volumes contributed to the increase, as CCL is enhancing its investment pricing to regain its competition in the market. Meanwhile, the group’s earnings before interest and tax (EBIT) marginally rose by 0.1% to $316.9 million in the first half of 2015, as compared to the corresponding period of last year.  The net profit surged 2.6% yoy to $187.3 million in 1H15, while the earnings per share (EPS) slightly rose by 0.9% yoy to 24.1 cents per share. The net profit attributable to shareholders grew by 0.9% on a year over year basis to $183.9 million. CCL also declared a full franked interim dividend of 20 cents, representing a payout of 83.0% for the first half of 2015 net profit.

       
        Australian Beverage Highlights (Source - Company Reports)

• Improved volumes drove Australian beverage business: CCL Australian beverage business revenues slightly rose by 0.5% yoy to $1.35 billion, driven by the 2.8% yoy increase in volumes during the first half of the financial year. CCL have been investing on pricing and innovation to reclaim its market leadership and sustain competition from its peers. As a result, CCL has invested on smaller pack formats like 250ml which were well received. The firm is also concentrating on premium glass packs. Meanwhile, household market penetration improved by 1.4% for this year to date (till June 13). The improvements in packaging, competitive pricing as well as aggressive marketing efforts have contributed to the increase. On the other hand, the Australian beverages revenue per unit case fell 2.2% yoy to $8.6 million, as compared to $8.8 million in the corresponding period of last year. Consequently, the EBIT margin declined by 1.1 basis points to 16.5% in 1H15, from 17.6% in 1H14. 

       
            Rising CSD single serve transactions (Source: Company Reports)

• Rising Penetration in Indonesia market: Indonesia & PNG generated a 12.4% yoy increase of trading revenues to $486.1 million in the first half of 2015, as the volumes rose 7.7% yoy to 105.7 million unit cases while the revenue per unit case increased by 4.3% yoy to $4. The group has been aggressively making investments in this segment to capture the huge potential market, by enhancing product availabilities and affordability. Moreover, CCL was able to improve its market share in CSDs by five points in this year to date. EBIT surged 46.4% to $22.4 million in first half of 2015, against $15.3 million in first half of 2014. On the other hand, the management reported that the Indonesian market beverages volume growth was below their expectations, as economic slowdown in Indonesia has impacted the consumer purchasing power. As per the New Zealand & Fiji segment, earnings surged 9.9% on a year over year basis, boosted by solid CSDs and water performance. Energy and sports drinks markets showed better penetration in New Zealand during the period.

       
        Indonesia & PNG Highlights (Source - Company Reports)

• Alcohol & Coffee promises growth potential: Alcohol & Coffee trading revenues soared 26.7% yoy to $177.1 million in first half of 2015, while the EBIT surged 30.4% to $14.6 million, as compared to pcp. Market share penetration across the Beam portfolio as well as new product launches have contributed to this earnings growth. The integration of Beam Suntory spirits range into the firm’s portfolio for Australia and New Zealand markets have boosted the overall segment’s business. CCL has ten year agreement with Beam Suntory. Expansion of Beer and cider were on track, while Yenda the craft beer was launched during March. CCL is also improving Grinders capsules range to boost its coffee business.

 
Outlook
 

• On track to deliver mid-single earnings digit growth:The first half of 2015 results indicated that the group is well focused to achieve its target of reclaiming mid-single-digit growth in earnings per share for the coming few years. Management also reiterated that Coca-Cola Amatil is also on track to achieve a three year cost savings target of over $100 million. Accordingly, CCL would be using these savings amount to invest in brand building, revenue management and marketing initiatives.  For the current year, the cost savings would be reflected in the second half of the year. Coca cola Amatil has also undertaken efforts to improve its productivity efficiency further. The firm estimates to incur over $300 million of capital expenditure for the fiscal year of 2015. Meanwhile, the capital expenditure for the first half of 2015 decreased to $39.4 million in 1H15, as compared to $91.6 million in the prior corresponding period. CCL has been investing in IT solutions, production facilities and cold drink coolers for the Australia segment. The group has rolled out Perfect Fruit machines and new tomato production snack line, under the SPC segment. Around $100 million is estimated to be invested on SPC for the next three years, with $78 million contributed from CCA while $22 million would be funded from Vic govt.  Three new production lines were installed in Indonesia. 

      
         Decreasing Capital Expenditure (Source: Company Reports)

• Australian business outlook: CCL’s main target is to regain its position in the Australian beverage business, and rebuilding its brand equity, making aggressive marketing investments and focusing on recruitment strategies accordingly. The firm intends to launch additional smaller portion packs, post the 250ml can success, consequently enhancing the affordability range for consumers. Coca-Cola Amatil is increasing its focus on healthy offerings like Barista Bros and Zico coconut water brands. CCL estimates to derive gains through its route trade after an aggressive re-routing initiative with over 30,000 customers.

• Promising Indonesia & Alcohol business Growth:  Although Indonesia growth was not as expected during the first half, the segment offers solid long term potential driven by the rising consumer purchasing power.  As a result, CCL has been positioning itself by offering broader range of products and made aggressive investments for Indonesia business through TCCC (The Coca Cola Company- parent of CCL). TCCC infused USD 500 million into the Indonesia market by acquiring a 29.4% equity interest in CCA Indonesia. Alcoholic beverage portfolio is also expected to grow rapidly boosted by the affordable product offerings as well as CCL’s customer servicing expertise to the licensed channel

      
       Alcohol & Coffee Highlights (Source - Company Reports)


 

• Huge Funding Potential: Coca-Cola Amatil has relatively a strong balance sheet, and has the ability to fund its potential growth opportunities. Accordingly CCL forecasts a dividend payout ratio of over 80% for the next three years. The firm has already made heavy investments on supply chain assets for its Australian beverage business over the past five years, and enjoy these investment benefits in the coming years. Net debt was reduced by $571.2 million to $1.3 billion during the first half of 2015, against pcp, as TCCC infused USD 500 million. On the other hand, the free cash flow fell to $54.4 million in the first half of 2015, impacted by working capital increase. The firm’s return on capital employed reached 18.2%, higher than its cost of capital.

      
      CCL Daily Chart (Source - Thomson Reuters)

      
 

• Stock Performance: Coca-Cola Amatil shares touched a one year peak price of $11 in the month of April, but could not sustain this levels, as investors were concerned if CCL would be able to achieve its forecasted earnings growth given the tough market conditions, heavy competition and changing consumers’ preferences for healthy beverages. Although, CCL has been diversifying its product base to healthy alternatives, the firm’s revenues are mainly dependent on the low margins cold drink business. However, the recent first half of 2015 performance have indicated that CCL is quite focused to achieve its strategy of mid-single-digit growth. The growing Indonesia & Alcoholic business penetration would also offer support to the stock in the coming months. The stock has a dividend yield of 4.8%, while the return on average equity is over 15.9%. Coca-Cola Amatil shares has corrected around 13.1% in the last three months, giving an entry opportunity to investors hunting for cheaper value dividend players. Based on the foregoing, we give a “BUY” on CCL at the current price of $8.54.

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