Australia | Apr 23 2007
By Greg Peel
Until Friday last week, the strategy update from Coca-Cola Amatil (CCL) had pleased rather than excited the analyst community, with a common view of overvaluation leading to an FNArena database B/H/S ratio of 0/3/5. Today, however, that ratio has jumped to 2/2/4.
The change is due to an upgrade from Neutral to Buy from Merrill Lynch, and the full double-whammy upgrade from Credit Suisse, from Underperform to Outperform.
Merrills believes that not only was Coke in a better position than the analysts had thought, it is better than the market currently thinks. And this is even taking into account recent share price strength.
Improving fundamentals in the Australian market, including increasing volumes and currency relief on costs, were drivers of earnings forecast increases of 4%, 13% and 12% in FY07-09. Also instrumental were acknowledgement that the Indonesian business has undergone a significant turnaround, and that the South Korean business will probably fetch a better price than the market assumes.
Credit Suisse appears to agree. The analysts have also lifted earnings forecasts, by 3.8%, 9.6% and 14.3% in FY07-09. CS believes Coke is still a good long term investment given its projected double-digit earnings growth out to 2010. The recent share price rally does not bother then analysts.
CS has lifted its price target from $7.85 to $10.40, and suggested a two-year target would be $11.35. Merrills has introduced a new target of $10.50, taking it to the top of the pile. The FNArena average target price thus moves from $8.13 to $8.89 – still below the market, and hampered by those brokers who maintain that Coke is overvalued.
Interestingly, while Merrills is assuming an above market $700m will be achieved for South Korea, CS is only assuming $350m. But CS suggests a price of $850m is actually more likely, which would add a further 65c to valuation.