Australia | Oct 24 2016
Coca-Cola Amatil has refreshed its strategy with a focus on still beverages, expanding categories in beer and coffee and growing its business in Indonesia.
-Structural headwinds in Australia while macro environment in Indonesia is challenging
-Shift to incidence pricing for concentrates aligns company more with The Coca-Cola Co
-Focus in Indonesia turns away from Coke towards still drinks and tea
By Eva Brocklehurst
Coca-Cola Amatil's ((CCL)) has refreshed its strategy with a focus on still beverages, expanding categories in beer and coffee and growing its business in Indonesia. Brokers welcome the extra detail on earnings targets and the drivers for its various drink businesses. Low single-digit EBIT (earnings before interest and tax) growth in Australia & New Zealand is forecast and double digit growth in Indonesia, PNG & Fiji. A 10% long-term (2023) EBIT margin in Indonesia/PNG is expected.
UBS retains more muted forecasts, reflecting a view that structural headwinds abound in Australia and the macro environment in Indonesia remains challenging. The broker notes there is a $50m restructuring charge and $75m in additional capex in 2017, amid expectations of a 2-3% increase in the cost of goods sold in Australia because of higher sugar and electricity prices, and a negative impact from US dollar forward contracts. From all that, UBS believes the stock is not cheap and retains a Neutral rating.
Citi is encouraged by the company's adaptation to the fact that the Indonesian market is more likely to be driven by tea and other still beverages instead of the company's flagship brand. Coca-Cola does not resonate with Indonesian consumers yet growth in GDP per capita and relatively young population have made the country appealing for some time for the Coca-Cola bottler. Citi believes the upside is now more significant as Amatil is placing less focus on cola and has an improving distribution capability. Citi retains a Buy rating and believes the company is well placed to achieve its earnings targets.
The company has announced a shift to incidence pricing, where concentrate prices differ depending on factors such as revenue, carton sizes and sales channels, rather than simply pricing by the litres sold. Coca-Cola Amatil will move to incidence pricing during 2017 when paying for concentrate. Brokers observe this should align the company more with The Coca-Cola Co, enabling revenue growth irrespective of pack size. Incidence pricing is commonplace among Coca-Cola bottlers around the world.
Deutsche Bank agrees the move to incidence pricing better aligns objectives with the parent company but retains some concerns that Amatil's share of the system profit pool could contract as the market moves towards smaller serving sizes. The broker cuts its rating to Hold from Buy as the share price has outperformed since the half year results.
The company was always going to have to find additional areas to reduce costs in order to hit its targets, Deutsche Bank asserts, given the difficult trends in certain categories. The original cost reductions of $100m over three years are expected to be achieved ahead of schedule in 2016 with a further $100m identified, mostly from the supply chain. Management highlights that incremental cost savings will be reinvested and not result in margin expansion.
Ord Minnett leaves its Australian EBIT forecasts unchanged, given they already imply no EBIT growth in 2017. Structural pressures are expected to create ongoing headwinds for the company, which in the broker's view creates a risk to guidance for the medium term. Consumption per capita of carbonated soft drinks in Australia is falling at an accelerating rate as the consumer's focus shifts to healthier lifestyles.
Competition is also increasing, via rising promotional intensity, particularly in grocery. Taxation is another area of concern, through the prospective container deposit scheme in NSW. The broker believes initiatives to address the structural product and channel challenges facing Australian beverages are sound, yet the size of the task is significant and the revenue outlook remains subdued.
Morgan Stanley has more confidence in the earnings outlook and in the growth businesses since the update. In Indonesia, the company has notably shifted its focus from the Coke brand more towards Sprite and Fanta and its non-carbonated drinks. The Indonesian operating environment is still difficult but the broker notes inflation has eased to 3-4% and the rupiah has stabilised.
The alcohol division looks set to be driven by the move to craft production in the Australian beer market and there are clear opportunities to take share and leverage the distribution network, in Morgan Stanley's opinion. The Grinders coffee business is envisaged benefitting from product innovation.
Macquarie maintains an Underperform rating despite a supportive balance sheet and dividend. While management is executing well, there are complications to the outlook, such as the container deposit scheme and incidence based pricing in Australia, which limit growth and create uncertainty for the broker.
There is a view that Amatil can better withstand the impact of a container deposit scheme given its premium price position but Macquarie has little doubt it will impact to some degree. In recent research the broker estimated the impact to group earnings would be 1-6% , assuming NSW, Queensland and Western Australia all adopt the program.
Positives taken from the strategy briefing are the ongoing opportunities to offset headwinds through cost re-allocation and maintenance of long-term guidance. Yet, Macquarie suspects strong volume declines in carbonated drinks are unlikely to abate in the short term and could be exacerbated by the implementation of a container deposit scheme and, possibly, incidence based pricing.
On FNArena's database the consensus target is $9.68, suggesting 2.1% upside to the last share price.Targets range from $7.90 (UBS) to $10.80 (Citi). The dividend yield on 2016 and 2017 forecasts is 4.8% and 4.9% respectively. There are two Buy ratings, four Hold and two Sell.
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