Coca Cola Amatil is a discretionary consumer products play, which, given the pessimism of Australian consumers, is to be considered with caution. The company has some scale advantages from its extensive distribution network — it is yet another oligopoly play (which means as much an economy play as a stock value play). The company can introduce new products cheaply, including alcohol and it has some pricing power, which maintina margins. Its operations in Indonesia gove it some geographical diversification. But it is probably fully priced. Brokers are ambivalent, with a neutral recommdantion and a price target of $13.84:
While CCL remains a good story, the profit and loss metrics are weaker than expected. Continued backward vertical integration into PET bottle pre-form and closure manufacture is worth c.1.0% to growth, reinvesting proceeds from the sale of its equity stake in Pacific Beverages was worth c.2.0% to growth, which means the trading result is worth just 1% to 2%. There appears to be leakage at the revenue line in Australia, perhaps reflecting the impact of the WOW terms outcome which started in the December 2011 quarter and/or channel mix across 1H12 which is seeing high NSR convenience and leisure (C&L) channel volumes weaker than supermarkets.
The stock is on a high earnings multiple of 17 times. The dividend yield is 4.5%. Merrill Lynch is more positive with a buy recommendation and a price target of $13.55:
Considering these challenges we believe CCL’s 1H12 guidance is satisfactory. CCL’s other businesses are performing well relative to expectations (particularly Indonesia) and ongoing efficiency gains coming from capex initiatives will continue to have a positive impact on earnings. We believe Coke’s ability to achieve mid single digit earnings growth as a mature producer in the current environment speaks to the power of its brands and quality of management.
We are forecasting CY12 NPAT growth of 9.3% for Coke Amatil, meaning that NPAT growth of 12.4% will be needed in 2H12 if Coke is to achieve our forecasts. We think this growth is achievable when you consider i) the increased support to earnings that should result from the group’s increased capex investment, and ii) that 2H11 was a weak period for CCL where it was excluded from the Woolworths catalogue for the first 11 weeks of 2H11 and also experienced a weak December.
Net debt to equity is relatively high at 80%, which should not be too problematic for an oligopoly. Much will depend on the prospects for the consumer discretionary sector.