Dividend investors should start watching Coke Amatil – but from the sidelines

Thursday, December 7th, 2017

ASX code: CCL
Share price: $7.69
Industry: Food & Beverages
Forecast FY2018 Dividend: 46.0 cents 70 per cent franked

Income investors will be wondering if Coca-Cola Amatil’s sliding share price makes the stock a buy for yield. At a $7.50 share price the dividend yield assuming a 46-cent dividend for 2018, the current consensus forecast, is 6 per cent – 70 per cent franked. The franking is lower than banks pay but the yield itself is higher than ANZ and CBA, in line with Westpac though lower than NAB. Should the stock be in income portfolios?

Our view would be not yet, but it is time to put Amatil on the watchlist and start thinking about the price one would pay. Most ASX large-caps have rallied nicely over the last year but Amatil stands out for its 20 per cent fall over the same period and its 31 per cent plunge since the stock peaked at $10.87 in April. The stock now trades at a 25 per cent earnings multiple discount to the All Industrials Index ex financials, its deepest ever discount. This should attract attention because the institutional shareholders of large companies do not tolerate such underperformance for long. Usually, there is a catalyst which causes the stock to revert higher. This could be a takeover, a change of directors, management or strategy, or a divestment of underperforming assets.

Amatil is a business in structural decline as Australian consumers switch from carbonated sugary beverages to healthier alternatives. New cola products and smaller pack sizes, bottled water, coffee and alcohol have not so far sufficiently offset this main trend and in the interim result, Australian beverages earnings fell 13 per cent – a problem when Australia contributes 58 per cent of group earnings. Cola and water are also particularly competitive categories, another problem in the first half, as were unfavourable channel and sales mix shifts. The rollout of container deposit schemes around Australia will further challenge Amatil by increasing compliance costs and raising the retail price of its products, and the company seems unable to quantify the impact at this stage. The stock fell further this week after an implied earnings downgrade in 2018 from bringing forward $40m of costs to improve marketing, execution, equipment and digital technology, and to cut prices, in Australia. In our view further such cost and price pressures are probable.

The positives include easing production costs in Australia and improving profitability in Indonesia.

Even businesses with structural problems have a price, and the game, in this case, is to consider the stock once the market prices it for worse than a reasonable bear case. Amatil currently trades on an earnings multiple of 13 times. This is comparable with the major banks but the banks are better businesses (easier growth, more pricing power). A rock-bottom valuation would be 10 times earnings or $5.50, where the business would be priced for no growth. Broker valuations currently average $8.30 but we see Amatil as a potential value trap because more earnings disappointments are likely. Our sights are set below $7.00.


Originally published in The Australian, Tuesday 28th November 2017.

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