This report has been prepared by UBS Securities Australia Ltd.
Global Research 18 February 2014
Coca-Cola Amatil LimitedWeak FY13 result as expected. Wat kin Alison do?
Event: Weak FY13 due to competition in Australian grocery segment
CCL reported a 7% fall in FY13 EBIT driven by ongoing price competition in the Australian grocery channel, unfavourable FX moves in Indonesia & PNG, and a weak performance from SPC Ardmona. NZ & Fiji, along with Alcohol were bright spots. The price premium of CCL products to Asahi/Schweppes (Australian Pepsi distributor) is now 49% (up from 43% in FY12) a level that needs defending.
Impact: Our FY14e EBIT lowered 4.4% to $839m (FY15e -6.4% to $866m)
We expect consensus EBIT to fall given today's result. We have taken the opportunity to cut our FY14 and FY15 numbers as well, despite being below consensus anyway. CCL's performance for FY14 will be determined in large part by whether or not CCL can get volume growth, without conceding too much price, in the Australian grocery channel. This depends in part on how deep Asahi/Schweppes's pockets are.
Action: Structural headwinds continue. Remain cautious. Waiting for new CEO.
This is clearly a disappointing result for outgoing CEO Terry Davis. CCL's strategy appears sensible, so we await commentary from the incoming CEO Alison Watkins to assess any changes made. Alison starts Monday 3rd March. We remain cautious on the stock given the headwinds of strong competition, consumer switching away from carbonated soft drinks and powerful customers in the Australian grocery channel.
Valuation: 12-mth PT lowered to $11.36/share (from $11.47). Stay with Neutral.
We have lowered our 12-month PT (SOTP-based) for CCL to $11.36/share (from $11.47) and maintain our Neutral rating on the stock. A lower Net Debt assumption for FY14e has been more than offset by our lower FY14e Group EBIT (-4.4%) and a drop in the EV:EBIT premium to the market we assume for the Australian business. We have moved this to 10% (from 15%) reflecting a more conservative stance.
12-month rating Neutral
12m price target A$11.36
RIC: CCL.AX BBG: CCL AU
Trading data and key metrics
52-wk range A$15.25-11.22
Market cap. A$8.57bn/US$8.18bn
Shares o/s 764m (ORD)
Free float 70%
Avg. daily volume ('000) 1,892
Avg. daily value (m) A$22.4
Common s/h equity (12/14E) A$1.78bn
P/BV (12/14E) 4.8x
Net debt / EBITDA (12/14E) 1.6x
EPS (UBS, diluted) (A$)
From To % ch Cons.
12/14E 0.70 0.67 -4.24 0.71
12/15E 0.74 0.69 -6.63 0.76
12/16E 0.78 0.71 -8.74 0.79
Craig Stafford, CFAAnalyst
[email protected]+61-2-9324 2277
[email protected]+61-2-9324 2782
Highlights (A$m) 12/11 12/12 12/13 12/14E 12/15E 12/16E 12/17E 12/18ERevenues 4,856 5,139 5,084 5,341 5,582 5,806 6,017 6,211EBIT (UBS) 869 896 833 839 866 890 924 956Net earnings (UBS) 532 559 503 515 532 547 570 593EPS (UBS, diluted) (A$) 0.70 0.73 0.66 0.67 0.69 0.71 0.74 0.76DPS (A$) 0.53 0.60 0.59 0.59 0.55 0.57 0.59 0.61Net (debt) / cash (1,644) (1,609) (1,682) (1,758) (1,769) (1,825) (1,859) (1,871)
Profitability/valuation 12/11 12/12 12/13 12/14E 12/15E 12/16E 12/17E 12/18EEBIT margin % 17.9 17.4 16.4 15.7 15.5 15.3 15.4 15.4ROIC (EBIT) % 20.1 19.7 19.0 19.9 20.0 19.9 20.0 20.0EV/EBITDA (core) x 9.6 10.0 10.7 9.3 8.9 8.6 8.2 7.8P/E (UBS, diluted) x 16.6 17.6 19.8 16.7 16.2 15.8 15.2 14.7Equity FCF (UBS) yield % 3.3 6.2 3.4 3.9 4.9 4.4 4.8 4.9Net dividend yield % 4.5 4.6 4.5 5.2 4.9 5.1 5.3 5.4Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of A$11.22 on 18 Feb 2014 17:41 EST
BELL POTTER SECURITIES LIMITED [email protected] ABN 25 006 390 772 WWW.BELLPOTTER.COM.AU AFS LICENCE NO. 243480
This report has been prepared by UBS Securities Australia Ltd and distributed by Bell Potter Securities Ltd ANALYST CERTIFICATION AND REQUIRED DISCLOSURES SECTION AT END OF REPORT. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict
of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Craig Stafford, CFA, Analyst, [email protected], +61-2-9324 2277
Coca-Cola Amatil Limited 18 February 2014
Investment Thesis 12-month rating Neutral
Coca-Cola Amatil 12m price target A$11.36
We see CCL as part way through a PE de-rate because:1. Capex has been growing faster than sales (ROIC is falling from 22% in FY10 to 17% in FY14e);2. Low hanging cost out opportunities appear harder to find;3. Price competition in the Australian supermarket channel still appears strong;4. Bottled water is a key growth market, but brand differentiation and therefore price premium remains difficult;5. Indonesia (12% EV) has been the main source of CCL Group growth in recent times but we expect growth to normalise as CCL appears to be losing share to low priced competitors. The main risk to our cautious call is: a) a value accretive beer deal (possible, but unlikely); and b) an easing of price based competition with Asahi/Schweppes.
The upside scenario detailed below could conservatively deliver a 10% valuation upgrade to $12.62/share (from $11.47).1. A value accretive beer deal (possible but unlikely);2 An easing of price based competition with Asahi/Schweppes (less likely in the near term we feel);3. Accelerating price and volume growth via improving the hit rate of product innovation; and4. After spending a lot on capex in recent years, CCL ease off for a few years and generate significant uplift in FCF.
A delay in the easing of higher than normal price based competition from Asahi/Schweppes by 2 years combined with a bigger loss in market share of carbonated soft drinks (CSDs) in the Australian beverage market could result in EPS downgrades of 10% and a de-rating of the PE that CCL trades on to reduce our valuation by around 15% to $9.75/share (from $11.47).
1. Mon 3 Mar 2014: New CEO, Alison Watkins due to start.2. Tue 13 May 2014: AGM.3. Late Aug 2014: FY14 half year result.4. Fri 29 Aug 2014: Outgoing CEO, Terry Davis expected to finish.
Coca-Cola Amatil (CCL) is the Australasian anchor bottler in the Coca-Cola system. CCL's portfolio of territories includes Australia, New Zealand, Fiji, Papua New Guinea and Indonesia (South Korea was divested in 2007), with Australia contributing approximately 72% of group earnings. CCL acquired SPC Ardmona in April 2005, which was a significant diversification move into food. In 2006, the company also expanded into spirits distribution and has a strategy of becoming the clear number three player in the Australian beer market by 2014.
1. Market concentration in the Australia non-alcoholic beverage market is reasonably high, with CCL (#1) and Asahi/Schweppes (#2) controlling 66% by value.2. Continued high levels of price based competition between CCL & Asahi/Schweppes is keeping pressure on margin growth.3. Health trends are pushing demand away from carbonated soft drinks (CSDs) towards bottled water and other beverages with perceived (often not real) health value.4. New product innovation by industry participants continues in an attempt to stem the trend towards water.5. While CCL enjoys strong brands, the dominance of Coles and Woolworths in the grocery sector is limiting margin growth.
Revenues by division (FY14e, %)
EBIT by division (A$m)
FY10 FY11 FY12 FY13 FY14e FY15e FY16e
Australia 593 607 621 575 595 626 648
NZ & Fiji 81 80 70 80 88 94 100
PNG75 88 103 104 95 108 123
Food & Services 94 93 95 89 98 98 98
Group 843 868 889 847 877 925 969
Source: CCL, UBS Estimates.
NZ & Fiji9%
Indonesia & PNG19%
Food & Services
Coca-Cola Amatil Limited 18 February 2014
Figure 1: Coca-Cola Amatil (CCL) FY13 Result Summary
$m FY12 FY13 Change (%) UBSe Diff (%) Comment
Operating Revenue 5,139 5,084 -1.1% 5,072 -0.2% CCL struggling for top line growth
EBITDA 1,129 1,085 -3.9% 1101 1.5%
Depreciation & Amortisation -233 -252 7.8% -254 0.9%
+ Australia 621 566 -8.9% 575 1.6% Strong competition in Grocery, weak consumer, trend away from CSD
+ NZ & Fiji 70 83 18.0% 80 -3.5% Good result in NZ and Fiji, assisted by favourable FX
+ Indo & PNG 103 92 -11.0% 104 13.1% >10% Vol g from Indo, was hit by weak PNG Vol g and unfavourable FX
+ Food & Serv 95 93 -2.2% 89 -4.7% Strong result from Alcohol, offset by weak SPC Ardmona
+ Other 0 1 1 0.0%
= EBIT 895 833 -6.9% 847 1.7%
Net Interest -112 -125 11.5% -133 6.6%
Tax Expense -225 -205 -8.9% -199 -3.0%
Reported NPAT (ex one offs) 558 503 -10.0% 515 2.5%
Reported NPAT 460 80 -82.6% 506 533.5% $404m write down of SPC Ardmona business to c$300m
Core EPS 73.4 65.9 -10.2% 66.1 0.3%
DPS 59.5 58.5 -1.7% 59.9 2.4%
Source: CCL, UBS estimates
Cash flow and Dividends: Operating Cash Flow (OCF) came in at $733m 1%
below FY12 at