Monday, 16 June 2014

A brief note on Coca Cola Amatil

As I was reading about Orora I came across another Australian listed company. It’s called Coca Cola Amatil and as the name would indicate it is a Coke bottler operating in Australia, NZ and Fiji and slowly expanding in the Indonesian region. It owns SPC Ardmona (packaged food company sold by the current CEO of Orora) and CCA is making moves in developing its alcoholic distribution business as well. Current market cap around $7bn, EV of $8.7bn and trades around 10.4x EV/EBIT and 8x EV/EBITDA. In terms of relative valuation, CCA is cheapest listed Coke bottler around the world; on a forward basis it is trading around 8.5x EV/EBITDA (vs 11x peer average, based on consensus).

What caught my attention was that the stock has been hitting 52-week lows. If you look over the last 6-9 months CCA has been on a downward trend from around $13 to $11 to April 2014 when a company released a trading update, which sent the share price down to the $9 levels, essentially wiping out c. $3bn market cap in the meantime.

It all started in February when CCA released 2013 annual results:
  • It showed a writedown of around $400m (mostly non-cash) related to SPC Ardmona as the business came under pressure from high AUD and product dumping from foreign competitors
  • The Australian non-alcoholic beverage unit, which is the bread and butter, was hurt by competitor price cutting, requiring more promotional spend and a generally weaker consumer environment
  • The Indonesian unit was impacted by price cuts from lower cost competitors, wage and fuel price inflation as well as currency moves
  • Then came the April trading update, which essentially said that EBIT is expected to be weaker 15% yoy in H1’14
  • CCA also announced a strategic review under the new CEO, which initially resulted in the reorg. of the Australian unit (announced in May)

I could go on but I think the picture is clear. CCA is coming under serious near-term difficulties both home and abroad, which are partly external (pricing pressure from competitors, currency etc) and partly internal (most important are the bloated SKUs and the high cost base).

The chart below is worth spending some time on. This essentially shows the Australian non-alcoholic beverage business’ SKUs and the volume sold by SKU. Complexity in the distribution channel increased substantially and as SKUs rose marketing spend was diluted, taking away from the core products.

Source: CCA filings and factbooks

Furthermore, the substantial increase in SKUs didn’t translate into relatively more volumes; between 2005 and 2012 volumes in this segment rose form 322m (unit case) to 349m, which is an 8% increase (to 2013 it’s only a 5% increase). The recently announced review will focus on a much-awaited SKU rationalisation, which should also translate into cost reduction and elevated focus across the brand portfolio. CCA also noted that they plan on closer cooperation with Coke (which owns 29% of CCA).

CCA is getting cheaper but is far from being very attractive in my mind. I generally like to refrain from timing an entry (it’s virtually impossible I think), but the changes required - reducing SKUs and shifting CCA into a lower cost base - will be a lengthy process for sure and there are still questions on SPC Ardmona, Indonesian business and so on. There will surely be more pain in the near term with the reorganisation especially in an environment where raw price increases are not able to be passed on, but the new CEO’s outline seems to address to key points head on. Let’s see, perhaps there will be further entry opportunities.