By Paul Rickard

Coca-Cola Amatil Managing Director Alison Watkins used the words “solid performance” on several occasions to describe the company’s full year result at yesterday’s analysts briefing. Solid it was, with earnings per share of 51.5c up 4.7% on 2014 and marginally ahead of the consensus forecast of 50.8c.

The final dividend of 23.5c per share was also a fraction higher than had been expected. As a result, the market gave the result a tick, with Coca- Cola shares adding 4.14% to close 35c higher at $8.80.

However, this is still a company where there isn’t much fizz to be found, and the growth outlook is at best only moderate. Longer term shareholders will recall that Coca-Cola Amatil (CCL) shares have almost halved over the last few years. From a high of $15.40 in March 2013, CCL shares fell briefly below $8.00 last week, before the recovery over the last few days.

 

Coke’s challenges

Coca-Cola Amatil has been caught up in that almost perfect storm. Its main Australian beverage business has been squeezed as consumers move away from sugar based soft drinks, and supermarkets flex their muscles and extract lower prices from manufacturers.

Meanwhile, the business that was meant to be the springboard for growth, the Indonesian franchise for Coca-Cola, has endured its own headwinds - a slowing economy, depreciation of the rupiah against the US dollar resulting in increased cost of goods sold, competition from Pepsi and higher   capital investment.

To meet the Indonesian challenge, Coca-Cola Amatil sold 29.4% of the Indonesian business to its parent (The Coca-Cola Company of the USA, which owns 29.21% of CCA), in return for the US company investing US$500m in the Indonesian venture.

For its Australian challenge, CCA has been changing the product mix with frozen soft drinks and smaller portions of Coke and Fanta, the launch of Coca-Cola Life, and investment in new business lines such as alcohol and coffee.

2015 result in line with guidance

Full year earnings for CCA were consistent with earlier guidance, with Group EBIT up 1.4% (“low single digit”) from $651.5m to $660.6m. With net debt falling mainly as a result of the equity injection by the US company in Indonesia, earnings per share for the company increased by 4.7%.

Positives from the result included a moderate improvement in the second half, with EBIT growing by 2.7% compared to the corresponding half in 2014. The alcohol and coffee division, while only contributing 5% of group earnings, saw strong earnings growth of 31.7%.  The offshore franchises - New Zealand, Fiji, PNG and Indonesia- also lifted earnings by 7% to 10%.

Australian beverages, which accounts for 70% of group earnings, saw EBIT stabilize. While it did increase in the second half, with product mix changes and greater efficiency and productivity, the underlying price/volume equation highlights the headwinds. Revenue per unit case in 2015 fell 1.3% compared to 2014, while volume rose by just 0.5%. The still water category was subject to considerable pricing pressure. CCA decided it was not going to follow the market down, preferring to stick to high value water segments. EBIT in this part of the business fell from $85m to $80m.

Outlook

CCA said that it is ahead of schedule with its cost out plan and on track to deliver at least $100m of cost savings. It expects the turnaround of the business to be gradual and steady, and despite the change in consumer tastes, has the product mix and product innovation capability to focus on revenue growth management. It has re-affirmed guidance for “mid-single digit” growth in earnings per share. 

It also expects to generate sufficient cash flow to facilitate a dividend payout ratio of over 80%, whilst maintaining a conservative balance sheet.

Based on last night’s closing price of $8.80, this sees Coca Cola Amatil trading on a multiple of FY16 earnings of 16.5 times, and 15.8 times FY17 earnings. Assuming a payout ratio of 85%, a prospective yield of 5.2% for FY16. If the franking is maintained at 2015 levels, the dividend will be franked to 75%, giving Coca-Cola a grossed up yield of 6.8%. 

According to the analysts, there is still value to be found in Coca-Cola Amatil, with the consensus target price at $9.66. This is likely to be revised up marginally following the result.

Coca-Cola is currently priced around mid market range. While it is not particularly cheap, it could be argued that for what is now perceived to be a defensive stock with tight guidance around earnings, it is attractively priced. It is now reasonably low risk, and the dividend yield is acceptable.

The challenge I have with the stock is I just can’t see how earnings are going to take off. Not enough fizz for me to want to buy more - for the defensive portfolios.

 

Disclosure

The author’s SMSF owns shares in Coca-Cola Amatil.