Ginger Coke Still Flat

By Glenn Dyer | More Articles by Glenn Dyer

Ginger coke just doesn’t cut it, certainly so far as investors in Coca Cola Amatil (CCL) are concerned?

In the first investor briefing for two years on Friday, Coca Cola Amatil talked up their cost cutting performance, with CEO Alison Watkins doubling the $100 million cost cutting target and lots of projections about regaining growth momentum in Australia and maintaining it in Indonesia.

That saw the shares edge up 4 cents last Friday to $10.10, still short of the 18 month high reached at the start of October of $10.26.

Then investor notes went out to clients from several leading analysts over the weekend and the reception on market yesterday was very different.

Down went the shares, falling close to 7% at one stage before ending trading still down 6.4% at $9.44 – the lowest the shares have been since April of this year.

More than 9.7 million shares were traded yesterday, over four times its recent daily volume, indicating a lot of big shareholders were lightening their holdings (but then others were buying).

The bottom line is that the idea of a ginger-flavoured Coke, cutting another $100 million in costs and reviewing its investment in troubled fruit and vegetable processor SPC Ardmona, was not convincing enough a strategy for big investors.

Bank of America Merrill Lynch analyst David Errington wrote in a note to clients (that got a lot of media coverage) that the company (is) ”working very hard … but the challenges look overwhelming to us”,

Deutsche Bank analyst Michael Simotas, questioned Coca-Cola Amatil’s plans to increase prices to combat rising sugar prices.

"Amatil has enjoyed broadly flat COGS [cost of goods sold] for the last two years. However, the group flagged that in 2017 COGS are expected to increase 2 to 3 per cent … due to higher sugar prices and FX (foreign exchange rates),” … he added "The company plans to offset this with higher pricing. Given the difficult category consumption patterns, we see this as a risk."

And, JPMorgan’s Shane Cousins, while saying CEO Watkins had stabilised earnings as she had promised, expressed concerned about how the company was behind the game as consumers turned away from sugary drinks and consumers drifted away from corner shops and small supermarkets to larger chains and fast food chains.

Mr Errington said he walked away feeling more downbeat about Coca-Cola’s outlook in Australia than before.

“Australian Beverages makes up 65 per cent of Coke Amatil’s earnings and we came away from today thinking that this business faces many challenges (probably more than what we were thinking going into the day),” he wrote in his note

He said Coca-Cola Amatil’s promise of earnings per share (EPS) growth in mid-single digits would be "tough" to pull off. "The overriding point we took from the day was that the company is working very hard (undertaking many projects) in order to retain EPS growth at around mid-single digit," he said.

“Over the past year, EPS growth has been higher but supported by lower interest costs (due to cash sitting in Indonesia). As the cash holding is expected to fall, EBIT growth needs to increase to offset the expected increase in interest costs which we believe will be tough over the next two or so years." Mr Cousins made a similar point saying that while Ms Watkins had stabilised earnings,”the main driver has been lower financing costs, with EBIT growth, a higher quality measure, lower than reported EPS growth,” he was quoted as telling the Financial Review.

But Citigroup’s research head, Craig Woolford was more optimistic than his rivals, pointing to the company’sIndonesian operations were Coca Cola Amatil is focusing more on tea, and water than cola and expanding into new areas. His was the minority view, at least yesterday.

And while analysts for Deutsche Bank and Macquarie said separately that while the proposition for maintaining its mid-to-single digit EPS growth was positive, there were complications to that outlook.

And UBS analysts said “Coca-Cola Amatil is facing a number of structural pressures, which in our mind create risk to guidance medium term.”

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About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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