Have we seen an example of sell on the fact before the facts are revealed in the performance of Coca Cola Amatil shares yesterday?
After they climbed to an all time high of $9.39 on Monday, they tumbled 39c yesterday to close at $9.00.
The shares had been rising strongly in recent weeks ahead of the results of the long awaited strategic review, due later today from the company.
It was a case of buying on the rumour and getting set and selling as the review results were made known but they selling started a day earlier.
It seems to have been promoted by increasing suggestions there won’t be a firm decision on the most important part of the review for many investors (especially food industry specialists), the fate of CCA’s underperforming South Korean operation.
There had been hopes the review would be a clean one: with all the options revealed, decisions made and then on to the execution, but it now looks like there could be a six week delay to a firm and final decision about the future of South Korea.
The bottling business in South Korea hasn’t performed like CCA management has said it would since it was acquired years ago.
Even the stumbling performance of the Indonesian operations is not considered to be a make or break part of any review unlike a decision on the future of South Korea.
CCA said in the annual report released just before Easter that “As part of the next three year business planning process, CCA is undertaking a strategic review of the business across all geographic locations.
“The review will establish the priorities for the business over the next three years with the detail of outcomes and priorities to be announced on 18 April 2007
And last November the review was framed this way in a trading update: “CCA is currently completing its three year business plans and as part of that process will undertake a strategic review of the business across all geographic locations.
“The review will encompass the key priorities for the business, taking into account the expansion of the business into alcoholic beverages, the changing customer landscape and the appropriate operating structure of the organisation. The results of the review will be announced no later than the end of the first quarter of 2007.”
The delay to April was revealed earlier this year when the 2006 results were released.
2006 was a tough year for the company: a slow and very hard first half where high prices for commodities such as oil, sugar, aluminium and PET resin ate into margins. Those pressures eased in the second half and the company margins recovered.
“This was successfully achieved throughout the second half of 2006 by successful execution of stronger revenue management initiatives. As a result, Group EBIT margins in the second half increased to a strong 14.3%, up from 14.2% in the second half of 2005,” CEO Terry Davis said in the annual report.
“We believe we have weathered the peak in commodity cost input increases. The business has experienced good price realisation in the year to date and as a result, we feel confident of an improved EBIT result in 2007.
“There will still be commodity-driven cost increases in 2007 so the priority for this year will continue to be price realisation through higher levels of innovation backed by outstanding in-market execution.”
For all the anticipation of the review and the direction for the company, the outlook for earnings will be the principal driver.
We have already seen the bones of the review in the decisions taken last year to move into alcoholic beverages distribution and the earlier one to get into food through SP Ardmona.
To the older hand around the markets the evolving make up of CCA is not all that different to the previous version of soft drinks and snacks: this time its soft drinks, alcohol and, food (although the sale of Ardmona is being tipped or suggested by UBS).
The real boost to the CCA share price will come from fixing its Asian operations by either sale, joint venture or closing them: that will do more to improve stability of earnings than anything else.
The rise in the Aussie dollar will cut into the returns from Asia but it will also offset (or should offset) any rise in the price of the magic black syrup sourced from KO (The Coca Cola Company). With sugar prices at 20 month lows the company is facing a further easing of pressure on margins while oil, aluminium and PET resin prices are not as high as they were a year ago.
