Bad News for Coca-Cola Amatil Creates Downside Risk, but We Don't Yet See a Domino's Effect

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Equity Bottom-Up

<div class="content-highlight">Narrow-moat <a href="https://www.smartkarma.com/entities/675" target="_blank" data-smartkarma-citation="entities:675:1">Coca Cola Amatil Ltd (CCL AU)</a> highlighted continued near-term challenges in its Australian beverages division at its investor day that will lead to lower fiscal 2018 profits than we previously anticipated. Nonetheless, there are still long-term growth drivers within the company’s portfolio, including its alcohol and coffee segment, non-carbonated beverages, and Indonesia. While we’ve reduced our forecast earnings for the next three years on the back of accelerated price cuts and marketing reinvestment, we’ve maintained our long-term assumptions and AUD 9.40 fair value estimate. We see a margin of safety in shares at present, as the market seems to be already pricing in a downside scenario for Australia.</div>To arrive at the current quote below AUD 8.00, we'd have to assume Australian revenue declines at a 4% clip over the long term, accelerating from recent trends, and EBIT margins fall to 13%, with operating income falling 8% annually versus 7.5% per year since fiscal 2012. We view this as an overly bearish case, in which new-product launches fail to resonate with consumers, retailers further pressure price, and escalating costs and restructuring investments eat into profitability without an associated benefit. Instead, we expect rising non-carbonated volumes to lead to fixed-cost leverage, mitigating the negative impact of falling carbonated sales, while technology and marketing investments, including the AUD 40 million pulled into fiscal 2018, help to stabilise margins.Amatil's Australian beverages segment continues to struggle with overexposure to a secularly declining carbonated soft drink market. But we expect long-term improvement from a continued push into dairy, juice, and higher-value water will lead to volume upside, offsetting a continued 3% annual decline in sparkling volumes, and price per litre growth from these products and smaller package sizes. We assume revenue in Australia can stabilise and long-run operating margins can return to roughly 16%.However, the improvement trajectory for Australian beverages looks bumpier than we previously assumed. During the investor day, management reiterated the business has improved following a difficult first half of the fiscal year, but that continued challenges warrant an acceleration of AUD 40 million of planned growth investments into fiscal 2018, rather than 2019 and 2020. These include further price cuts, increased marketing expenses, new equipment, and technology expenditure. Amatil doesn't anticipate any associated immediate cost saving benefit with this outlay, and as such we've reduced our 2018 margin forecast by about 150 basis points, to 13.7%.Beyond 2018, the company expects the AUD 40 million investment will benefit fiscal 2019 and 2020 by about AUD 20 million each year, given the investment has been pulled forward. We’re less optimistic. Given the ongoing competitive pressure, concerns around Amatil’s retailer relationships, and unknown success of new carbonated products, we’ve reduced our 2019 margin forecast by 100 basis points, to 14.4%, and maintained our 2020 operating margin assumption at about 15.5%, still below the 15.7% level recorded in fiscal 2017.Moreover, we continue to expect solid gains for Amatil outside of Australian soft drinks. We expect Indonesia in particular to drive substantial growth for the company, climbing to 20% of EBIT by fiscal 2021 from 10%, as revenue increases at a low-double-digit rate. We think Amatil's strategy in this market makes sense. The company shifted its focus in 2014, opting to move into a more mass-market opportunity rather than a high-priced, luxury niche. Since embarking upon this strategy, volumes in the combined Indonesia and Papua New Guinea segment have climbed at more than 8% per year. A slowing economic environment in Indonesia, particularly in private consumption, has led to volumes declining versus the prior comparable periods in recent quarters, but we project annual volume growth of about 8% in our base case as the country's economic growth improves. We also see average price per litre climbing over the medium term. The company’s strategic shift has led to pricing falling at a 3.5% annual rate since fiscal 2013, but we expect this trend to reverse as the firm rolls out new products and smaller package sizes. Overall, we forecast EBIT margins climbing to about 9.5% by fiscal 2021, keeping the firm on track to meet its 10% target by fiscal 2023.Amatil's alcohol and coffee segment should also support long-term earnings growth. The company has expanded its range of offerings in recent years through distribution partnerships and acquisitions, including the recent purchase of Western Australia brewer, Feral. This business was only about 6.5% of EBIT in fiscal 2016, but we expect rising craft consumption and positive pricing to drive high-single-digit operating earnings growth, lifting fiscal 2021 contribution to about 9%.Analyst: Adam Fleck, CFA

Narrow-moat Coca Cola Amatil Ltd (CCL AU) highlighted continued near-term challenges in its Australian beverages division at its investor day that will lead to lower fiscal 2018 profits than we previously anticipated. Nonetheless, there are still long-term growth drivers within the company’s portfolio, including its alcohol and coffee segment, non-carbonated beverages, and Indonesia. While we’ve reduced our forecast earnings for the next three years on the back of accelerated price cuts and marketing reinvestment, we’ve maintained our long-term assumptions and AUD 9.40 fair value estimate. We see a margin of safety in shares at present, as the market seems to be already pricing in a downside scenario for Australia.To arrive at the current quote below AUD 8.00, we'd have to assume Australian revenue declines at a 4% clip over the long term, accelerating from recent trends, and EBIT margins fall to 13%, with operating income falling 8% annually versus 7.5% per year since fiscal 2012. We view this as an overly bearish case, in which new-product launches fail to resonate with consumers, retailers further pressure price, and escalating costs and restructuring investments eat into profitability without an associated benefit. Instead, we expect rising non-carbonated volumes to lead to fixed-cost leverage, mitigating the negative impact of falling carbonated sales, while technology and marketing investments, including the AUD 40 million pulled into fiscal 2018, help to stabilise margins.Amatil's Australian beverages segment continues to struggle with overexposure to a secularly declining carbonated soft drink market. But we expect long-term improvement from a continued push into dairy, juice, and higher-value water will lead to volume upside, offsetting a continued 3% annual decline in sparkling volumes, and price per litre growth from these products and smaller package sizes. We assume revenue in Australia can stabilise and long-run operating margins can return to roughly 16%.However, the improvement trajectory for Australian beverages looks bumpier than we previously assumed. During the investor day, management reiterated the business has improved following a difficult first half of the fiscal year, but that continued challenges warrant an acceleration of AUD 40 million of planned growth investments into fiscal 2018, rather than 2019 and 2020. These include further price cuts, increased marketing expenses, new equipment, and technology expenditure. Amatil doesn't anticipate any associated immediate cost saving benefit with this outlay, and as such we've reduced our 2018 margin forecast by about 150 basis points, to 13.7%.Beyond 2018, the company expects the AUD 40 million investment will benefit fiscal 2019 and 2020 by about AUD 20 million each year, given the investment has been pulled forward. We’re less optimistic. Given the ongoing competitive pressure, concerns around Amatil’s retailer relationships, and unknown success of new carbonated products, we’ve reduced our 2019 margin forecast by 100 basis points, to 14.4%, and maintained our 2020 operating margin assumption at about 15.5%, still below the 15.7% level recorded in fiscal 2017.Moreover, we continue to expect solid gains for Amatil outside of Australian soft drinks. We expect Indonesia in particular to drive substantial growth for the company, climbing to 20% of EBIT by fiscal 2021 from 10%, as revenue increases at a low-double-digit rate. We think Amatil's strategy in this market makes sense. The company shifted its focus in 2014, opting to move into a more mass-market opportunity rather than a high-priced, luxury niche. Since embarking upon this strategy, volumes in the combined Indonesia and Papua New Guinea segment have climbed at more than 8% per year. A slowing economic environment in Indonesia, particularly in private consumption, has led to volumes declining versus the prior comparable periods in recent quarters, but we project annual volume growth of about 8% in our base case as the country's economic growth improves. We also see average price per litre climbing over the medium term. The company’s strategic shift has led to pricing falling at a 3.5% annual rate since fiscal 2013, but we expect this trend to reverse as the firm rolls out new products and smaller package sizes. Overall, we forecast EBIT margins climbing to about 9.5% by fiscal 2021, keeping the firm on track to meet its 10% target by fiscal 2023.Amatil's alcohol and coffee segment should also support long-term earnings growth. The company has expanded its range of offerings in recent years through distribution partnerships and acquisitions, including the recent purchase of Western Australia brewer, Feral. This business was only about 6.5% of EBIT in fiscal 2016, but we expect rising craft consumption and positive pricing to drive high-single-digit operating earnings growth, lifting fiscal 2021 contribution to about 9%.Analyst: Adam Fleck, CFA

코카콜라 아마틸, 단기 전망은 부진하지만 장기적으로는 개선 전망; 주가 저평가