Following the Investor Day presentation release on Friday, shares in Coca-Cola Amatil Ltd (ASX: CCL) have nosedived more than 6%, heading back below $10 this morning. Investors apparently weren't excited with the information revealed during the presentation, with Amatil reiterating its guidance targeting mid-single-digit earnings per share growth over the next few years.
Cost savings the primary source of growth?
Management confirmed that its previous $100 million cost savings target would be met in Financial Year 2016, and an additional $100 million of potential savings could be delivered in the next few years. Which is great, but investors probably weren't a fan of the fact that cost savings will be one of the company's biggest 'growth' drivers going forwards.
Indonesia, Fiji and Papua New Guinea (PNG) remain important for their growth potential, although significant capital expenditure will be needed in Indonesia in particular. Yet so far significant growth in Indonesia has been masked both by weak market conditions in that country, as well as minor declines in volume in Australia, offsetting other growth so far. Management looks to be cutting capital expenditure in Australia in order to free up cash for its growth markets, effectively using Australia as the cash cow to fund overseas growth.
This makes sense, given the very competitive business conditions in Australia – capital expenditure is likely better expended elsewhere. The lower capital expenditure also supports the company's strong dividend payout ratio – which is set to remain above 80% of profits for the foreseeable future.
The new Property division
Management is creating a new 'Property' division, which will hold all of Amatil's warehouses and start charging rent to the businesses using that land at market rates. A somewhat puzzling decision, given that all that will happen is money gets sent in a big circle from Amatil to Amatil. Presumably the intention is to ensure all tenants are justifying their existence, plus Amatil could look at spinning off its land and leasing it back in the same way that Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) have done. BWP Trust (ASX: BWP), in which the BWP stands for 'Bunnings Warehouse Property', owes its very existence to this kind of financial manoeuvring.
Is it time to buy Coca-Cola Amatil?
Frankly I thought the update was pretty good and very informative – all shareholders should read it. There's very little that was truly new however, and much of the company's plans are already well known by the market. According to my own measure of intrinsic value, Coca-Cola Amatil shares are worth around $11 to $12 each.
Yet I recently sold my Amatil shares because I thought that the upside was limited given how long I'd been waiting for business performance to improve. Amatil is a good business and its cash flows and dividends are highly reliable – if you're after dividends it could be a strong pick. However, it's just not that exciting for the growth investor.
