AUSTRALIA CCL AU Price (at 07:11, 11 Sep 2013 GMT) Neutral A$12.00 Valuation A$ 12.03 - DCF (WACC 7.8%, beta 1.0, ERP 5.0%, RFR 3.7%, TGR 3.2%) 12-month target A$ 12.98 12-month TSR % +12.8 Volatility Index Low GICS sector Food, Beverage & Tobacco Market cap A$m 9,163 30-day avg turnover A$m 28.0 Number shares on issue m 763.6 Investment fundamentals Year end 31 Dec 2012A 2013E 2014E 2015E Revenue m 5,097.4 5,111.3 5,522.5 5,900.3 EBIT m 895.5 876.4 941.6 1,010.5 Reported profit m 459.9 520.4 562.5 614.0 Adjusted profit m 558.4 529.6 562.5 614.0 Gross cashflow m 791.8 786.8 837.3 889.3 CFPS 103.8 103.0 109.2 115.6 CFPS growth % 7.0-0.7 6.0 5.8 PGCFPS x 11.6 11.6 11.0 10.4 PGCFPS rel x 1.15 1.12 1.29 1.37 EPS adj 73.2 69.3 73.4 79.8 EPS adj growth % 4.5-5.3 5.8 8.8 PER adj x 16.4 17.3 16.4 15.0 PER rel x 1.01 1.05 1.15 1.18 Total DPS 59.5 56.4 58.0 59.9 Total div yield % 5.0 4.7 4.8 5.0 Franking % 86 75 75 75 ROA % 14.0 12.7 13.0 13.4 ROE % 27.2 24.7 24.5 24.7 EV/EBITDA x 10.0 10.0 9.3 8.9 Net debt/equity % 77.4 85.8 74.7 65.5 P/BV x 4.4 4.2 3.9 3.6 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, September 2013 (all figures in AUD unless noted) CSD Trend not Coke s friend Event The 1H13 result was characterised by significant volume declines in the Australian grocery channel. We discuss these trends in more detail and form a view as to some of the underlying drivers behind the declines. Impact CSD weakness cause for concern. Whilst destocking was clearly a partial driver behind the weak Australian volume, we estimate CCL s carbonated soft drink (CSD) volumes have declined by ~1.5% pa since 2008. Strong growth has been delivered in bottled water to offset this; however, CSDs comprise 74% of Australian volume, suggesting CSDs are likely to remain a drag on volumes in the near to medium term. PepsiCo performance improving. Much has been made of the defensive strategies CCL has had to employ to ensure Pepsi s new Pepsi Next brand failed to gain traction. Yet in the March-13 quarter, Pepsi grew its overall volumes 4.5%, notwithstanding some cannibalisation between the brands an improvement from late 2012. Clouds looming over Indonesia? The lacklustre medium-term growth outlook in Australia increases the pressure on the Indonesian business to continue its strong revenue and volume growth momentum. However, consumer confidence has started to slow, with the recent removal of fuel subsidies from the Government combined with increasing interest rates in a bid to curb inflation. This, coupled with the slightly earlier timing of Ramadan in June, could see a slowing in sales growth in 2HFY13. We have trimmed our 2H numbers accordingly. Earnings and target price revision FY13E EPS -1%, FY14E EPS -1.2%. Price target unchanged at $12.98. Price catalyst 12-month price target: A$12.98 based on a DCF methodology. Catalyst: CCL s investor tour in Indonesia in November should Action and recommendation The strong growth in the Indonesian business over the medium term coupled with a slowdown in capex over the next 2 years supports our DCF-based valuation of $12.03 for CCL (previously $12.08). However, in the near term, earnings momentum remains weak, suggesting to us the share price is likely to remain equally subdued over the coming months, albeit the dividend yield is likely to provide some ongoing support. We maintain our Neutral recommendation on valuation grounds. 11 September 2013 Macquarie Securities (Australia) Limited Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.
CCL currently losing the Grocery Battle A major negative feature of CCL s 1HFY13 result was the impact on the grocery channel within the Australian business, which contributed materially to the 6.2% decline in divisional revenues and 10.1% decline in EBIT. Fig 1 CCL s collapse in grocery volumes impacted 1H EBIT significantly Source: Company reports, Macquarie Research, September 2013 Grocery roughly half the Australian volume. Due to the volume pressures, grocery s share of CCL volumes fell from 51% to 47% in 1HFY13, with a 12muc decline in 12 months. Fig 2 A 12 muc decline in the 1H through the grocery channel muc 1H12 1H13 Change % Grocery 85.9 73.8-12.1-14.1% Non-grocery 81.7 83.0 1.3 1.6% Total 167.6 156.8-10.8-6.4% Source: Company reports, Macquarie Research, September 2013 Destocking part of the reason. Management has ascribed roughly half the decline to destocking from major retailers during the half, a result of a build-up of inventory in December ahead of the peak January and February season (not reflecting that well on the health of the 2HFY12 result, which across both channels saw a 3.4% or 5.9muc increase), and then further destocking during the half which accounts for ~6muc of the decline. Increased competition, but why the impact on volume? An elevated level of competition was flagged as the other reason for the decline in volumes, with Australia MD White claiming an increased investment in marketing and promotional activity was required to protect Coke s premium position. Usually in the event of protecting one s brand, we would expect to see volumes hold up better than price, yet in the CCL result, pricing was actually positive across Australia (+0.35%), yet volumes still declined. A key question therefore is how much of the decline can be attributed to competition and destocking, versus a potential decline in consumption of carbonated soft drinks (CSDs), CCL s largest category by unit cases. We note FY12 saw some CSD growth on the pcp, although we suspect this was due to FY11 having materially wetter weather over the key summer sales period a better comp is FY12 on FY10, which shows a continuation of the longer-term decline in both sugar and non-sugar CSDs. The chart below highlights the disconcerting trend in both CSDs and non-sugar CSDs over the past five years. 11 September 2013 2
Fig 3 Growth in smaller categories but key CSD looks challenging Beverage category type (muc) 2008 2009 2010 2011 2012 2012 4yr CAGR Sugar CSDs 207.8 200.3 199.1 192.8 195.6 1.4% -1.5% Non sugar CSDs 67.0 65.6 65.2 60.9 62.9 3.3% -1.6% Total CSDs 274.8 265.9 264.3 253.7 258.5 1.9% -1.5% Bottled Water 40.2 55.2 54.9 50.7 52.4 3.3% 6.8% Other (flavoured milk, RTD Tea) 3.4 6.9 6.9 13.5 14.0 3.3% 42.9% Sports Drinks 10.1 10.4 10.3 10.1 10.5 3.3% 1.0% Juice 3.4 3.5 4.1 4.7 7.0 48.6% 20.2% Energy Drinks 3.4 3.5 3.4 6.8 7.0 3.3% 20.2% Total Beverages 335.1 345.3 343.2 338.3 349.3 3.3% 1.0% Source: Company reports, Macquarie Research, September 2013 Water growth. CCL does appear to be offsetting the weakness in CSDs through growth in bottled water and to a lesser extent juice (although the percentage growth in this category could well be skewed by rounding), but overall CSD volumes comprise 74% of total unit cases, hence persistent declines in this category are likely to weigh on the overall medium-term volume growth outlook across the Australian beverage portfolio. Market share decline or category share decline? Recent industry data through to March (prior to the poor June quarter) saw CCL experiencing relatively poorer value and volume growth across the core soft-drink category than other competitors. Within the cola category in particular, Pepsi experienced 9.4% volume growth compared to Coca Cola s 3.9% decline. Overall, however, March quarter 2013 saw total NARTD value increase by 3.5% and volume increase by 4.1% CCL is growing below market, in our view, outside of water. Fig 4 March quarter grocery and convenience channel paints CCL in a poor light By Value ($m) Category size CCL growth Others growth By Volume CCL growth Others growth Soft drinks 590-1.5% 0.0% Soft drinks -6.3% 6.6% Still Water 133 23.5% 24.1% Still Water 41.8% 24.8% Fruit juice 148-32.5% -4.5% Fruit juice -40.8% -5.3% Energy drinks 124-6.1% 1.4% Energy drinks -10.7% -3.0% Source: Industry sources, Macquarie Research, September 2013 Trimming our expectations on volume. With so little growth seemingly available to CCL in the core CSD category, we struggle to see CCL delivering positive volume growth in the 2H, with only modest volume growth of 0.5-1% in our longer-term assumptions. Could a volume problem become a pricing problem? A bigger challenge for CCL going forward is not so much generating volume growth in a mature category, but rather maintaining the strong degree of COGS inflation recovery and pricing growth it has been able to maintain over several years. With volumes under more pressure than they have been in some time and the premium over rivals like Pepsi already at around 50%, we believe this could become more challenging going forward. In terms of sensitivity, every 1% decline in CCL s Australian EBIT margin is worth ~$6m of EBIT and $0.35 or ~3% to the valuation. 11 September 2013 3
Indonesia storm clouds on the horizon? The lacklustre medium-term growth outlook in Australia increases the pressure on the Indonesian business to continue its strong revenue and volume growth momentum. Fig 5 Indonesian consumer confidence starting to soften Source: Bank of Indonesia, Macquarie Research, September 2013 However, consumer confidence has started to slow with the recent removal of fuel subsidies from the Government combined with increasing interest rates in a bid to curb inflation. This, coupled with the slightly earlier timing of Ramadan in June, could see a slowing in sales growth in 2HFY13. Fig 6 Indonesia lifting interest rates to combat inflation Source: Bank of Indonesia, Statistik Indonesia, Macquarie Research, September 2013 As a result, we have trimmed our 2HFY13 Indonesia/PNG volume forecast to 8% from 11% previously, with pricing per case growth likely to prove negative again in spite of higher inflation, reflecting the higher mix of cheaper bottled water sold. 11 September 2013 4
Remains a core driver for the business longer term. Notwithstanding the slowdown, Indonesia remains the core incremental EBIT driver for the group, with our EBIT expectation for the division growing from $105m in FY12 (12% of group EBIT) to $224m by FY16 (21% of group EBIT). Stuck in a holding pattern near term Neutral recommendation retained The strong growth in the Indonesian business over the medium term coupled with a slowdown in capex over the next 2 years supports our DCF-based valuation of $12.03 for CCL (previously $12.08). However, in the near term, earnings momentum remains weak, suggesting to us the share price is likely to remain equally subdued over the coming months, albeit the dividend yield is likely to provide some ongoing support. 11 September 2013 5
Fig 7 CCL fundamentals Coca Cola Amatil Ltd (CCL) Year ended 30 June $m 1HFY12 2HFY12 FY12 1HFY13 2HFY13 FY13 FY14 FY15 FY16 Profit and Loss Sales Beverages 2,099 2,321 4,421 2,028 2,428 4,456 4,842 5,194 5,522 Alcohol, Food & Services 329 390 719 318 381 699 724 752 781 Other 21 21 42 22 22 44 44 45 46 Total Sales 2,428 2,711 5,139 2,346 2,810 5,155 5,567 5,946 6,303 Total Sales growth 7.8% -3.7% 1.4% -3.4% 3.6% 0.3% 8.0% 6.8% 6.0% Total COGS 1,916 2,095 4,011 1,847 2,174 4,022 4,353 4,665 4,959 Total COGS as a % of sales 78.9% 77.3% 78.0% 78.8% 77.4% 78.0% 78.2% 78.5% 78.7% EBITDA 512 616 1,128 498 635 1,134 1,213 1,281 1,344 Total D&A - 111-123 - 233-124 - 133-257 - 275-275 - 278 EBIT Australia 293 331 624 264 318 582 591 610 628 New Zealand and Fiji 31 39 70 34 49 83 97 104 106 Indonesia & PNG 28 78 106 31 91 122 153 189 224 Other (incl. corporate) - - - - - - - - - Alcohol, Food & Services 50 45 95 45 44 89 97 103 107 Total EBIT 402 493 895 374 502 876 939 1,006 1,066 Total EBIT margin 16.5% 18.2% 17.4% 15.9% 17.9% 17.0% 16.9% 16.9% 16.9% Total EBIT growth 3.7% 2.6% 3.1% -6.9% 1.9% -2.1% 7.1% 7.1% 6.0% Non-recurring items - 15-120 - 135-13 - - 13 - - - Total EBIT 387 373 760 361 502 863 939 1,006 1,066 Share of income from associate/ JV - - - - - - 3 5 6 Net interest - 56-58 - 114-62 - 73-135 - 151-149 - 161 Pretax profit 331 315 646 299 429 728 790 861 911 Tax Expense recurring - 100-125 - 224-87 - 124-211 - 227-247 - 261 Tax Non-Recurring 15 21 36 4-4 - - - Total Tax Expense - 85-103 - 188-83 - 124-207 - 227-247 - 261 Tax rate 25.6% 32.8% 29.1% 27.8% 29.0% 28.5% 28.8% 28.7% 28.6% Net Profit after tax 246 212 458 216 305 521 563 614 650 Minorities - - 0-0 - 0-0 - 0-0 - 0-0 Profit attributable to ord shareholders 246 212 458 216 304 520 563 614 650 Adjusted profit after tax 246 310 556 225 304 530 563 614 650 Cash Flow Statement Operating cash flows EBITDA 512 616 1,128 498 635 1,134 1,213 1,281 1,344 Change in Working capital - 139 24-115 - 169 178 9-37 - 34-34 Less net interest paid - 69-35 - 104-73 - 73-146 - 151-149 - 161 less cash tax paid - 108-59 - 167-89 - 100-189 - 219-238 - 251 Net Operating Cashflow 196 546 742 167 641 807 806 860 898 Net Cashflow from Investing 138-516 - 378-332 - 235-567 - 322-348 - 379 Dividends paid net of DRP - 211-172 - 383-249 - 184-433 - 378-419 - 439 Net Cashflow from financing - 9 157 147-111 - 184-296 - 378-419 - 439 Net increase/(decrease) in cash held 329 184 512-277 222-55 107 94 80 Balance Sheet Cash 993 1,178 1,178 907 1,129 1,129 1,235 1,329 1,409 Other current Assets 1,585 1,753 1,753 1,659 1,815 1,815 1,955 2,084 2,214 Current Assets 2,579 2,931 2,931 2,566 2,944 2,944 3,190 3,413 3,624 Non-current assets - - - - - - - - - Investment in Joint Venture - 24 24 24 24 24 27 32 38 Non-current Assets 3,442 3,778 3,778 4,041 4,139 4,139 4,191 4,270 4,378 Total Assets 6,021 6,709 6,709 6,607 7,083 7,083 7,381 7,683 8,001 Short term debt 226 351 351 379 379 379 379 379 379 Other current liabilities 1,049 1,398 1,398 1,069 1,425 1,425 1,538 1,645 1,752 Current liabilities 1,275 1,749 1,749 1,448 1,804 1,804 1,917 2,023 2,130 Long term debt 2,292 2,436 2,436 2,650 2,650 2,650 2,650 2,650 2,650 Other non current liabilities 421 460 460 416 416 416 416 416 416 Non-current Liabilities 2,713 2,896 2,896 3,066 3,066 3,066 3,066 3,066 3,066 Total Liabilities 3,988 4,645 4,645 4,514 4,870 4,870 4,982 5,089 5,196 Total Shareholders Equity 2,032 2,064 2,064 2,093 2,213 2,213 2,398 2,594 2,805 Financial Ratios EV/EBITDA x 9.4 9.5 8.8 8.2 7.8 EV/EBIT x 11.9 12.3 11.4 10.5 9.8 P/E x 16.5 17.3 16.3 14.9 14.1 EPS $ $ 0.32 $ 0.41 $ 0.73 $ 0.30 $ 0.40 $ 0.69 $ 0.73 $ 0.80 $ 0.84 EPS Growth % 4.7% 3.7% 4.1% -8.8% -2.2% -5.1% 5.8% 8.8% 5.4% DPS $ $ 0.24 $ 0.36 $ 0.60 $ 0.26 $ 0.30 $ 0.56 $ 0.58 $ 0.60 $ 0.63 Dividend yield % 5.0% 4.7% 4.8% 5.0% 5.3% GCFPS x 1.0 1.0 1.1 1.2 1.2 P:GCFPS x 11.6 11.7 11.0 10.4 10.0 Book value per share $ 2.7 2.9 3.1 3.4 3.6 NTA per share $ 0.7 0.8 1.0 1.2 1.5 P/BV x 4.4 4.1 3.8 3.6 3.3 Net Debt $m 1,459.2 1,599.3 1,492.6 1,399.1 1,318.7 ND:ND+E % 41.4% 41.9% 38.4% 35.0% 32.0% Net debt: EBITDA x 1.3 1.4 1.2 1.1 1.0 Interest Cover x 7.8 6.5 6.2 6.7 6.6 RoA % 14.3% 12.9% 13.3% 13.6% 13.9% EBIT Margin % 17.4% 17.0% 16.9% 16.9% 16.9% RoFE % 24.8% 21.0% 22.0% 23.1% 23.7% Return on equity (excl. abnormals) % 27.2% 24.9% 24.7% 24.9% 24.3% Source: Company data, Macquarie Research, September 2013 11 September 2013 6
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 60 100% 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 2013 AU/NZ Asia RSA USA CA EUR Outperform 49.80% 57.68% 48.05% 41.13% 61.75% 47.10% (for US coverage by MCUSA, 8.12% of stocks followed are investment banking clients) Neutral 39.85% 24.45% 42.86% 54.70% 34.42% 30.89% (for US coverage by MCUSA, 6.60% of stocks followed are investment banking clients) Underperform 10.35% 17.87% 9.09% 4.17% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients) Company Specific Disclosures: Macquarie Bank Limited makes a market in the securities in respect of Limited. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Risk Disclosure: 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 offerrings 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. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 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