Shares of Australia's distributor of Coca-Cola products, Coca-Cola Amatil Ltd (ASX: CCL), drifted mostly flat today despite confirmation of a key investment from parent, The Coca-Cola Company.
A $US500 million investment in CCA's Indonesian business by the US-based beverage giant was announced in October 2014 and came after years of lacklustre growth in the huge Asian market.
The Coca-Cola Company is already a major shareholder in Coca-Cola Amatil but with this investment it will also take a 29.4% equity stake in the Indonesian business, named PT Coca-Cola Bottling Indonesia.
The cash injection will accelerate the company's capital expenditure in the competitive market for the next three to four years. Around $170 million per year will be spent on production, warehousing and cold drink infrastructure.
Coca-Cola Amatil has long flagged Indonesia as a key growth market. However, revenue per unit has fallen in recent years. In addition significant wage and cost inflation have had a profound effect on earnings.
However, it's important to put the market's potential into perspective.
In 2014, Indonesia and PNG accounted for just 18.7% of group revenue, combined. Whilst currency depreciation, wage and cost inflation are outside the company's control; the risk-reward trade-off appears asymmetrically.
Meaning, for shareholders, if the investment doesn't result in a meaningful return in the next three to five years it wouldn't be a disaster because the markets' account for just 19% (approximately) of total revenue. However if the Coca-Cola brand can gain traction in these countries – which have a population of 260 million – the returns could be significant.
Therefore at today's depressed share prices (it's down 14% in the past three years), Coca-Cola Amatil could be worthy of consideration.
