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

With a better return on equity against industry median and a broad portfolio, Coca-Cola Amatil Ltd (ASX: CCL) seems to be tracking well in terms of performance improvement. Indonesia and PNG reflect a clear highlight in latest results and proffer a step change in profitability scenario. Product development coming online with various launches are also set to provide value.

Renewed Partnership with Burger King New Zealand: Coca-Cola Amatil Ltd (ASX: CCL) reported that they had renewed their partnership with Burger King New Zealand for a further ten years. Both the parties have been together since the last 25 years. With customers asking for more options, the group has developed the new fountain experience to offer 50 beverage options with 25 being low and no kilojoule ones. It is worth to note that Burger King, which is the nation’s second biggest hamburger chain, has 83 restaurants across New Zealand. The partnership with Burger King is expected to drive CCL’s overall revenue and sales in sparkling beverages, juice and energy.
 
Focusing on volume based growth (Source: Company reports)
 
Launched Coca-Cola plus Coffee brand: The group launched a brand-new flavor, Coca-Cola plus Coffee No Sugar. The group believes that the Australians’ love for coffee would drive this brand. The group’s recent limited-edition flavor, Coca-Cola Ginger was successful in Australia which was also inspired by the Australians’ love for taste of ginger drinks. The group’s Coca-Cola No Sugar also got good response with over 28% of Sparkling Beverage consumers in Australia consuming Coca-Cola No Sugar. Over 39% have consumed Coca-Cola No Sugar more than once while brand achieved a penetration in state immediate consumption and HORECA (hotel/restaurant/cafe) of over 68%. They launched Keri Juice Blenders in June which is already above target penetration in state immediate consumption and HORECA at over 27%. The Volume per outlet for Keri Juice Blenders already exceeded earlier juice offerings and is getting a High re-order rate. The group has been planning to have more Sparkling Beverage products in the second half of 2017 by launching more rotational flavors to attract lapsed consumers and new consumers. They are also targeting innovative packaging for special occasions while targeting opportunities for the HORECA channel.
 
Strong cost control: The group is remodeling supply chain which includes Richlands warehouse automation project and ‘Business Excellence’ program. They are also outsourcing merchandising while restructuring sales force to control costs. Other efforts from the group include procurement optimization and Support services optimization. They are expecting to deliver at least a further $100 million in the three years till 2019 via these efforts. The group is aiming to deliver a further $20 million per annum which would be delivered from 2020 by closing South Australian manufacturing facilities. They are shifting other manufacturing activities to Kewdale (WA), Moorabbin (Vic) and Northmead (NSW) while targeting a new glass production line at Richlands as well as expanding dairy and juice capacity at Richlands. The group made agreements for the sale and leaseback of the Richlands manufacturing and warehousing facility in Queensland, with a one-off gain in the second half to offset one-off costs from Australian Beverages’ cost optimization initiatives for the year. They would get proceeds of over $156 million which would lead to a one-off gain of over $100 million before tax in the second half.
 

Cost optimization and reinvestment programs (Source: Company reports)                    
 
Earnings growth in Indonesia and Papua New Guinea: The group’s Indonesia trading revenue fell 2.8% year on year (yoy) in the first half of 2017 to $ 530.3 million impacted by Discretionary consumer spending. But the group was able to deliver a decent EBIT performance, which rose over 37% yoy to $50.7 million. They made strong progress on their business transformation and delivered efficiency gains in manufacturing and route-to market. CCL continues to invest in developing capabilities in the business while gaining share in Sparkling Beverages and tea. The group continued to invest in manufacturing facilities, cold drink equipment while rolled out their route to-market model across Java, Bali and Sumatra. EBIT margin enhanced 2.8 points to 9.6% in the first half of 2017 from 6.8% in the prior corresponding period. Meanwhile, Papua New Guinea delivered a double-digit EBIT growth driven by slightly favorable economic conditions before the national election. For 2017, the group has been focusing on their Sparkling Beverages category, while enhancing share in Still Beverages as well as continues to roll out route-to-market model.
 

Indonesia market opportunity (Source: Company reports)
 
First half of 2017 performance highlights: The group’s underlying earnings before interest and tax (EBIT) fell 4.3% to $312.7 million while underlying net profit after tax (NPAT) lost 4.1% yoy to $190.1 million in the first half of 2017. The group bought 26.7 million shares for $247.82 million under the buyback program. The group’s statutory EBIT reached $241.3 million while statutory NPAT reached $140.1 million. The group’s net debt increased by $274.0 million to $1,266.8 million during FY17 on the back of their share buyback program. They declared an interim dividend of 21.0 cents per share which is an underlying payout ratio of 81.4% during the period.
 

First half of 2017 performance (Source: Company reports)
 
Weakness in Australian Beverages’ performance: The group’s Australian Beverages segment was under pressure in the first half of 2017 with revenues falling 5.1% on a yoy basis while volume lost 3.9% hurt by the Easter period, rising competition as well as subdued consumer spending across the board. The group witnessed pricing pressure in Sparkling Beverages since Easter during the period. On the other hand, the group’s volume in branded water enhanced driven by investment in price in the last few months. The segment also delivered a decent performance in energy and dairy for the half, showing an expanding position in major growth categories. The group is progressing well with redevelopment of their Richlands facility, including new glass and dairy lines and state-of-the-art fully automated warehousing. Sale and leaseback of their Richlands land and buildings would deliver a $100 million before tax one-off gain in the second half. The group is also working with the New South Wales Government on introducing the container deposit scheme (CDS). As per 2016 estimates, overall number of eligible containers for the entire industry in NSW was in the order of 3.5 billion and that Coca-Cola Amatil’s share was in the order of over 25%. The new CDS was marked for coming into effect in NSW on December 01, 2017 while charging to suppliers (including CCL) was said to be commencing from November for creating liquidity. While earnings might be impacted by CDS implementation, outlook at other efforts and performance remain resilient.

Outlook: CCL forecasts underlying NPAT for FY17 to be in track with FY16. They are aiming for a medium-term target to be mid-single-digit EPS growth based on the success of revenue initiatives in Australia, Indonesian economic factors and regulatory conditions in each of these markets. On the other hand, the group sees that the rollout of container deposit schemes in Australia would hurt their performance over the next couple of years given the inherent uncertainty of the impact across the industry. For 2017, their capex is forecasted to be around $365 million, while the group forecasts a similar capex in 2018. They are aiming for a medium-term dividend payout ratio of over 80% but the franking would continue to be at a lower level as compared to the earlier years.
 
Stock performance: The shares of CCL lost over 20.9% in this year to date (as of November 10, 2017) impacted by the lower than expected performance in Indonesia, challenging conditions in Australia, pricing pressure, competition and rising debts. On the other hand, the group is launching new brands to attract new customers, while expecting a better performance in various regions. CCL’s broad portfolio is expected to maintain growth while private label water is growing in New Zealand. The support also comes in from the parent company, Coca Cola’s strong balance sheet. We believe investors can leverage the correction in the stock as an entry opportunity considering the undervaluation. Trading at a solid dividend yield, we give a “Buy” recommendation on CCL at the current price of $8.12



CCL Daily Chart (Source: Thomson Reuters)

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