Readers will, by now, be familiar with the story of Coca-Cola Amatil Ltd (ASX: CCL).
After some difficult trading conditions, company profits declined and the company booked massive write-downs on its SPC Ardmona division in 2013.
Subsequently a new CEO was appointed, part of the Indonesian operations were sold to parent organisation The Coca-Cola Company and supply chain reform was conducted in Australia. The full-year 2014 results, released in April took most of the hit.
In the presentation, management confirmed that it expected no further declines in earnings and a return to mid-single digit growth over the next few years. The first half 2015 results are due out in just a few weeks and here's what I think investors can expect:
- Revenues slightly up
Coca-Cola is renewing its focus on marketing and the launch of Coke Life has likely also contributed to higher volumes, while lower shelf prices may also have played a part.
- Earnings to be broadly flat, margins down slightly
It's difficult to predict where earnings will come in due to the complications of businesses in multiple currencies. Basically I expect continued difficulties in Indonesia and relatively flat results for New Zealand and Australia, offset by reduced costs thanks to supply chain improvements conducted last year.
Continued discounting is likely to crimp margins further.
- Capital expenditure to be up
Thanks to a $500m investment from The Coca-Cola Company, Amatil will ramp up its development plans in Indonesia, hoping to bring forward the profitability of that segment.
I expect capital expenditure in Australia to rise somewhat as management consolidates its manufacturing and invests in new products like Barista Bros.
- Dividends to increase
If things turn out better than expected I wouldn't be surprised to see Amatil announce a small increase in its dividend. Amatil is often seen as a dividend stock and it looks as though the business is aiming to keep investors on its side with a continued high payout ratio
In addition to these four predictions there are a number of things investors should be hoping NOT to see:
Warning signs
- Marked deterioration in Australian business, characterised by low sales, low margins, or both. Both would be a clear warning sign and a catalyst for rethinking my investment
- Raising dividends without growth, which would reflect management overly concerned with the happiness of the shareholders
- Further deterioration in Indonesia; While it won't turn around overnight, the situation getting worse would raise some red flags
- High (or low) capital expenditure in Australia without justification. I will be looking to see that management does not overspend in a mature market for modest returns, nor that capital expenditure is dramatically trimmed back to boost cash flow and dividends.
Overall though it is important to remember that this is just a six-monthly check-up, one of many in what is hopefully a long and prosperous shareholder relationship with Coca-Cola Amatil.
Just over a month ago I wrote that Amatil shares look cheap at today's prices. I stand by that statement and the upcoming report will be the first occasion to 'reality check' my investing thesis.
