Australia | Jul 24 2020
Coca-Cola Amatil’s sales trend improved in the month of June, but the future remains uncertain
-Better than expected sales improvement
-Indonesian assets written down
-Outlook for Coca-Cola Amatil remains virus dependent
By Greg Peel
Brokers were surprised by the news in Coca-Cola Amatil’s ((CCL)) June quarter update that the month of June saw a vast improvement on the earlier months in the quarter. Group volumes fell -9% in June (year on year) compared to -26% in May – a better result than analysts had expected.
Australian sales fell -4% compared to -20% in May. New Zealand – where they know how to handle a virus – saw sales increase by 4% compared to a -10% May fall. In Indonesia – where they simply can’t control a virus – sales fell -23% compared to -40%.
The company has announced an impairment on Indonesian assets will be taken in the interim accounts to the tune of -$160-190m. There was no reason given, but we might be able to draw our own conclusions.
The better than expected June sales numbers clearly reflect the reopening of Australia and New Zealand. While sales of fizzy drinks and other beverage offerings at supermarkets remained strong during the lockdowns, “on-the-go” sales, from anywhere there’s a vending machine, such as servo, or post-mix, such as a bar, obviously collapsed in April-May.
The bad news is one does not offset the other in earnings terms, given “on-the-go” is high margin and supermarket sales low margin, particularly for multiple can/bottle “value packs”. Further bad news is that in the star geography of New Zealand, that margin spread is lower.
Analysts call this “channel mix”.
The major bad news is, of course, that unlike New Zealand, parts of Australia are now back in lockdown, other parts have been told to pretend they’re in lockdown, and the risk of other states, meaning NSW, going back into lockdown increases every day.
The good news is the company has announced significant cost-cutting worth -$140m, and a reduction in planned capex spend to $200m from $300m.
The share price jumped over 5% yesterday on the release of the numbers, but brokers consider the risks ahead fully priced in. Six of seven FNArena database brokers covering the stock have Hold or equivalent ratings, albeit Morgans is yet to update on the news.
The dissenter is Citi, which retains a Buy rating and applauds the company for acting decisively in cutting costs before a lower demand backdrop. That said, most effusive about the news is Credit Suisse:
“CCL’s trading update highlights positively that the world loves Coke and consumers are likely to resume consuming CCL products.”
Longer Term
Maybe so, but long before the virus appeared analysts were highlighting a less than subtle change in consumer behaviour – one of shunning fizzy drinks and caffeine and shifting to more healthy alternatives.
That said, Amatil does sell “healthy” alternative such as milk (flavoured), juice (high in sugar), mineral water, water (allegedly more water is consumed to produce a bottle of water than is in the bottle), tea, coffee (caffeine) and alcohol in many forms.
UBS, while acknowledging Coca-Cola Amatil is a “strong company”, with a clear strategy of expanding its coffee, alcohol and “healthier” alternative offerings and penetrating more developing nations, like Indonesia, reminds that a consumer focus on healthier beverage alternatives remains a headwind.
And as a result of the virus, more at-home eating and a decline in total restaurant numbers also provide structural challenges.
The FNArena database carries six Hold or equivalent ratings and one Buy as noted. The consensus target is $9.25, suggesting 4.3% upside from the last traded price. The stock hit a high of $14.58 in 2013 and $12.88 in February this year.
Consensus has a dividend yield of 2.8% in 2020, reflecting cash conservation at this time, and 4.5% in 2021, but clearly that is more of a guess than a forecast.
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