Coca-Cola Amatil: You need to pay up CCEP

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
22 January 2021, 9:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel

  • Coca-Cola Amatil's (ASX:CCL) 4Q trading and FY20 guidance was materially stronger than expected. In the 2H20, CCL delivered modest earnings growth vs the pcp.
  • With volumes recovering as COVID restrictions ease and A$145m of cost savings targeted by FY22, we think the business is well placed in the future.
  • We think CCL’s better than expected trading justifies a higher offer price. With the share price trading at a small premium to the offer price, clearly the market agrees.

Better than expected FY20 result

CCL’s preliminary FY20 guidance exceeded our forecasts and consensus. FY20 underlying EBIT was A$550.7m, -13.9% on the pcp and 9.7% better than our forecast of A$502.1m and ahead of Factset consensus (A$508.8m).

Importantly, the business recovered in 2H20 as restrictions eased and underlying EBIT rose 3.2% on the pcp. Underlying NPAT of A$340.3m (-13.6% on FY19A) was also 9.1% ahead of our forecast and a 9.8% beat to consensus.

Pleasingly, CCL delivered its A$140m cost saving target and the balance sheet finished in a strong position, with net debt reducing A$289m on the pcp to A$1,462m (or A$963m ex. AASB16). The result will be reported on 18 February.

Australia and New Zealand drive the beat; costs controlled tightly

The beat reflected a stronger than expected 4Q recovery across Australia (returned to 2H growth) and New Zealand during the important Christmas trading period. The result was delivered despite CCL returning NZ$7.2m in wage stimulus to the New Zealand Government during the 2H (no stimulus benefits in the full year result).

Indonesia and PNG also delivered better than feared results (2H EBIT -9.2% vs. -59.7% in 1H) due to the benefit of strong cost control and A$10.8m in reduced D&A (post the 1H Indonesian asset impairment). We note an extra two trading days in 2H20 added ~A$7-10m to group EBIT.

Material upgrades to our forecasts and valuation

Our FY20/21/22 NPAT forecasts have risen by 9.1%/6.1%/5.2% respectively. Following earnings upgrades, our valuation has risen to A$11.43 from A$10.83 previously. Strong earnings growth over the forecast period reflects a recovery in volumes as restrictions ease and CCL’s A$145m of targeted cost savings by FY22.

CCEP takeover progressing; update will pressure a higher offer

CCL continues to progress with Coca-Cola European Partners (CCEP) takeover offer via scheme of arrangement. A scheme booklet is expected to be sent to shareholders in early March 2021.

Given CCL’s stronger than expected trading update and medium-term earnings benefits from its COVID and ‘Fighting Fit’ cost savings (A$145m cumulative), we think this increases the pressure on the Board to pursue a higher offer from CCEP (login to view target price). We now forecast a final dividend of 26cps, 50% franked.

The offer price now represents only a 11.5% premium to our new valuation. Based on our revised forecasts, the offer price represents an FY20 EV/EBITDA multiple of 12.0x or 9.9x on more normalised earnings (FY22 or post a full recovery from COVID and the delivery of its cost saving target).

Past bottler transactions have been done on about 10-12x EV/EBITDA, with developed countries at lower multiples and emerging countries at higher multiples given their stronger growth profile.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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