Coca-Cola Amatil. Not as fizzy as it looks A$8.78 AUSTRALIA. Event. Impact. Earnings and target price revision. Price catalyst

Transcription

1 AUSTRALIA CCL AU Price (at CLOSE#, 21 Aug 2015) Underperform A$8.78 Valuation A$ DCF (WACC 8.7%, beta 1.0, ERP 5.0%, RFR 3.8%, TGR 1.9%) 12-month target A$ month TSR % +7.3 Volatility Index Low GICS sector Food, Beverage & Tobacco Market cap A$m 6, day avg turnover A$m 21.2 Number shares on issue m Investment fundamentals Year end 31 Dec 2014A 2015E 2016E 2017E Revenue m 4, , , ,608.4 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x CCL AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2015 (all figures in AUD unless noted) 21 August 2015 Macquarie Securities (Australia) Limited Not as fizzy as it looks Event CCL reported 1H15 NPAT of $187.3m, above of our $165.1m forecast, and equating to 24.1cps, 0.9% above the pcp. Impact Underlying Australian volume and value growth profile challenged by subdued economic backdrop and consumer spending. CCL described consumers as very value oriented and cautious : Negative underlying market volume growth: CCL s 2.8% Australian volume growth was boosted by ~1.7% period-end timing (+3 days in 1H15 vs 1H14) and market share gains (+2.2ppts gain in grocery cola market). Management stated CSD industry volumes fell 2.5% YoY. Lower revenue per case: -2.2% driven by increased discounting (~0.7%) and mix changes across channels and package types (~1.5%). Market share gain requires significant investment. CCL has heavily invested to deliver positive volume growth in Australia, well ahead of the delivery of >$100m cost-out program over the next three years. Margin contraction of ~1.1ppts drove a -6.1% EBIT decline in Australia as CCL invests in the business to grow volumes. Reported volume growth overstated. The unusual timing of the period-end (3 July 2015) has overstated volume growth in each division. This is the first time since 1H11 that CCL has adjusted its period-end from the 30 June/31 December cycle. This had the effect of adding ~1.7% to volumes. CCL will see a 1.6% headwind in 2H15, with HY volatility likely in Bridge to FY15 guidance: Our estimate of underlying 1H15 EBIT growth (-2.7%) was weaker than reported (+0.1%) due to the timing of Ramadan and three extra days in the period. With a ~1.6% headwind in 2H15 from three fewer days than 2H14, an acceleration in underlying EBIT growth is required to reach guidance of no further decline in earnings in FY15. This will be highly dependent on the magnitude and timing of the cost out program. Underlying Indo/PNG EBIT growth -4.3%, well below reported (-46.4%). Underlying volume growth of +1.3% was below management expectations, once Ramadan and period-end timing are adjusted for, reducing reported revenue growth from 12.4% to 5.7% underlying. We estimate the operating leverage to Ramadan drove Indo/PNG reported EBIT growth (46.4%), which when removed (in addition to the 3 additional days), would take underlying Indo/PNG EBIT growth to -4.3%. Earnings and target price revision EPS FY %, FY16-1.1%, FY %. TP -4.7% to $8.99. Price catalyst 12-month price target: A$8.99 based on a DCF methodology. Catalyst: Progress of cost-out program through 2H15. Action and recommendation Underperform. CCL is facing significant long-term demand headwinds, with price and volume growth a challenge in its core markets. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 Macquarie Wealth Management Fig 1 Coca Cola the good, the not so good and the interesting The good The not so good The interesting Earnings outlook commentary unchanged: FY15: no further decline (consensus 1.8%) Medium term: mid-single digit EPSg (Consensus 4.2% in FY16, 5.2% in FY17) Reduction in capex requirements: Now expected to be $300m in FY15 ($91.6m in 1H15) then reduced over the next few years vs. previous guidance announced in Feb 2015: ~$330m p.a. over the next three years. Balance sheet well placed: The $500m TCCC capital injection for 29% of Indonesia drove net debt from $1.9bn to $1.3bn, net debt to equity to 57% and interest cover improved from 5.2x to 6.2x. Earnings ahead of expectations: Operating EBIT of $316.9m was 7.6% above our $294.5m forecast. 1H15 NPAT of $187.3m, 13.5% above of our $165.1m forecast, and equating to 24.1cps, 0.9% above the pcp. Coke Life is meeting expectations. Repeat purchase rate of 26% was seen, a favourable outcome vs. a set of ~130 product launches analysed by CCL. 8% of Coke Life customers are new to Coke trademarked products. Expected to represent 1% - 2% of Coke branded products as launch related marketing rolls off (has been ~4.5% to date) Launched a 24 can pack in July Cash flow soft: Operating cash flow declined 37% and free cash flow by 43%, driven by the working capital build, partly seasonal (Ramadan timing, stock build ahead of site closures, etc). This working capital build is expected to reverse in 2H15 to make FY15 a relatively normal year from a cash flow perspective. ROCE declined from 20.5% in 1H14 to 18.2% in 1H15, driven by increased working capital driving capital employed higher. Underlying Indo/PNG EBIT growth -4.3%, well below reported (- 46.4%). Underlying volume growth of +1.3% was below management expectations, once Ramadan and period end timing are adjusted for, reducing reported revenue growth from 12.4% to 5.7% underlying. We estimate the operating leverage to Ramadan drove Indo/PNG reported EBIT growth (46.4%), which when removed (in addition to the 3 additional days), would take underlying EBIT growth to -4.3%. Three extra days in 1H15 add 1.7% to revenue growth. The unusual timing of the period end has overstated volume growth in each division. This is the first time since 1H11 that CCL has adjusted its period end from the 30 June/31 December cycle. This had the effect of adding ~1.7% to volumes and revenues: As these three days are weekdays, the true impact of this overstatement may be less than the simple calculation above. If CCL revert to calendar period ends for the next four HYs, significant volatility from period ends should be expected. Restructured divisional disclosure created a growth business: Unsurprisingly, the newly formed Alcohol and coffee division delivered strong EBIT growth +30.4% on the pcp. While small ($14.6m EBIT), trading revenue increased +26.7% to $177.1m driven by strong performance in the Spirit and RTD segment and significant growth in the Beam portfolio, boosted by the launch of new products. Source: Company data, Macquarie Research, August August

3 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 1-Jul Dec Jun Dec Jun Dec Jun Dec-14 3-Jul Dec Jun Dec Jun Dec-17 1-Jul Dec Jun Dec Jun Dec Jun Dec-14 3-Jul Dec Jun Dec Jun Dec-17 Macquarie Wealth Management Result highlights Fig 2 Three additional days in 1H15 Fig 3 resulted in an estimated 1.7% revenue boost Days in period Estimated revenue impact 2.0% 1.5% 1.0% 0.6% 0.5% -0.5% -1.0% -0.5% -1.5% -2.0% 0.5% -0.5% 1.7% -1.6% -1.1% 1.7% -0.5% 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 Source: Company Data, Macquarie Research, August 2015 Source: Company Data, Macquarie Research, August 2015 Fig 4 Revenue growth moderate Fig 5 EBIT margin to stabilise Revenue ($m) 3, , , , , , Revenue Revenue growth Forecast 2H18e 1H18e 2H17e 1H17e 2H16e 1H16e 2H15e 1H15 2H14 1H14 2H13 1H13 2H12 1H12 2H11 1H11 2H10 1H10 2H09 1H09 2H08 1H08 2H07 1H07 2H06 1H06 Revenue growth (%) % 1 5.0% -5.0% % EBIT ($m) EBIT EBIT margin EBIT margin (%) 25.0% Forecast 2H18e 1H18e 2H17e 1H17e 2H16e 1H16e 2H15e 1H15 2H14 1H14 2H13 1H13 2H12 1H12 2H11 1H11 2H10 1H10 2H09 1H09 2H08 1H08 2H07 1H07 2H06 1H % 1 5.0% Source: Company Data, Macquarie Research, August 2015 Source: Company Data, Macquarie Research, August 2015 Fig 6 Drag from Cola and deflation in water are expected to accelerate in 2015, offsetting water volume growth as well as traditional growth categories (sport, energy) PERel (12m fwd vs. ASX200) 1.60 PERel (12m fwd vs. ASX200) St Dev Average St Dev Source: Company Data, Macquarie Research, August August

4 Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a neutral view on. The strongest style exposure is Profitability, indicating this stock is efficiently converting its investments to earnings as proxied by ratios such as ROE, ROA etc. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 285/472 Global rank in Food Beverage & Tobacco % of BUY recommendations 22% (2/9) Number of Price Target downgrades 3 Number of Price Target upgrades 0 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Food Beverage & Tobacco) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple % -50% -30% -10% 10% 30% 50% 70% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Change in Cash FY0 PE Growth FY1 Price to Earnings FY0 Asset Turnover Capex Growth EPS Growth FY1 Operating Accruals Non-current Assets Inc. -26% -26% -21% -22% Negatives Positives -30% -20% -10% 0% 10% 20% 30% 22% 20% 19% 25% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/472) Percentile relative to market(/414) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 21 August

5 Macquarie Wealth Management Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) CCL AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August month target price methodology CCL AU: A$8.99 based on a DCF methodology Company-specific disclosures: CCL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 17-Jul-2015 CCL AU Underperform A$ Jul-2015 CCL AU Neutral A$ Apr-2015 CCL AU Neutral A$ Oct-2014 CCL AU Neutral A$ Oct-2014 CCL AU Neutral A$ Aug-2014 CCL AU Underperform A$ Jul-2014 CCL AU Underperform A$ Apr-2014 CCL AU Neutral A$ Feb-2014 CCL AU Neutral A$ Nov-2013 CCL AU Neutral A$ Nov-2013 CCL AU Neutral A$ Aug-2013 CCL AU Neutral A$ May-2013 CCL AU Neutral A$ Feb-2013 CCL AU Neutral A$ Aug-2012 CCL AU Neutral A$13.99 Target price risk disclosures: CCL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group 21 August

6 Macquarie Wealth Management Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 21 August