Coca-Cola Amatil Limited

Decent outlook underpinned by its revenue driven strategy: Coca-Cola Amatil Limited (ASX: CCL) has recently presented its business prospect in the investor day program and highlighted about 1HFY18 activity and its future prospect. As per the presentation, the group operates through five business segments i.e., Australian Beverages, New Zealand & Fiji, Indonesia & Papua New Guinea, Alcohol & Coffee, and Corporate, Food & Services which contributed trading revenue around 51%, 12%, 20%, 11%, and 6% respectively of total group trading revenue in 1HFY18. In addition to this, Australian Beverages contributed higher underlying EBIT of 59% in total underlying EBIT in 1HFY18 and rest contribution came from other segments. As per the management, FY18 would be softened because of ongoing accelerated re-investment of approximately $40 million out of cost savings in Australia. This capital will be used for marketing activities and state-of-the-art technology for a digital platform and cold drink equipment. With this, the management expects decent growth in the future. Further, the management expected that New Zealand & Fiji and Alcohol & Coffee are expected to deliver growth in line with the Shareholder Value Proposition. Additionally, in 2HFY18, Australian Beverages has shown some encouraging signs however volumes are still tracking slightly below FY17, and Indonesia’s NARTD demand remains soft with local results also affected by cost pressures and a weak currency. However, the return on capital employed remains strong at 20.3 percent in 1HFY18, an increase of 20 bps to 1H17 and is expected to improve in years to come.
 

Segmental Performance (Source: Company Reports)

Valuation-wise, CCL still looks to have some potential with Net Margin at 19.0% in 1HFY18 compared to the negative net margin of 15.2% in 1HFY17. Resultantly, RoE has also been turnaround with a positive return of 13.7% from negative RoE of 7.7% in the prior corresponding period. Further, the company has maintained its debt/equity ratio of 0.12x which is in-line with the industry average. It has sufficient liquidity with the current ratio of 2.06x compared to the industry median of 2.02x. Meanwhile, CCL has performed well on the bourses, generating positive YTD return of 1.89%. However, the stock has fallen 10.56% in the past one month owing to indication of soft trading levels and it might encounter few challenges in enhancing shareholder value in mid-single digit with earnings per sharegrowth in the medium term which will depend on the success of revenue initiatives in Australia, Indonesian economic factors and regulatory conditions in each of the markets. Given the backdrop of its revenue driven strategy and current trading scenario, we maintain our “Hold” recommendation on the stock at the current market price of $8.745. 
 

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