Ever since 2013 it's been a tumultuous few years for Coca-Cola Amatil Ltd (ASX: CCL). The share price was over $15 back then before coming close to dipping under the $8 mark a few times in 2016. Performance now appears to have stabilised somewhat after Alison Watkins became managing director in March 2014, and the share price is up almost 15% over the last 12 months.
Amatil manufactures and distributes The Coca-Cola Co branded products as the principal licensee in Australia and also has operations in New Zealand, Indonesia, Papua New Guinea, Fiji and Samoa. There is a strong relationship between the two companies, with Coca-Cola owning a 29% stake in Amatil.
Amatil also has its own brands that it manufactures and distributes, such as Mount Franklin and Deep Spring, which makes for a wide range of beverage products, including; soft drinks, water, fruit juice, energy drinks, flavoured dairy, ice tea, alcohol and coffee.
The group's performance went into a sharp decline in 2013, after more than a decade of strong returns that saw the share price rise close to 400% since the year 2000. A strategic review was launched in October 2014 by the then newly-appointed Ms. Watkins in order to stabilise earnings and restore growth. The review, combined with a $100m cost optimisation program initiated in the same year, is intended to spark a turnaround of the company's fortunes.
Of note from the company's latest half-year results, announced August 2016:
- Australian Earnings Before Interest and Tax (EBIT) down 1.9% to $218m (67% of group EBIT).
- NZ & Fiji EBIT up 5.4% to $46.7m (14% of group EBIT).
- Indonesia and PNG EBIT up 65.2% to $37m (11% of group EBIT).
- Alcohol and Coffee EBIT up 33.6% to $19.5m (6% of group EBIT).
- Net Profit After Tax (NPAT) rose 7.8%, or $15.3m.
So besides the Australian market, the company appears to be operating fairly well in most areas. The problem is that the Australian sparkling beverage segment (Coca-Cola and other soft drinks) remains the company's biggest source of revenue and it is going backwards. Australian revenue was down 3.6% for the period on the back of declining sparkling sales.
The $15m increase in NPAT is also interesting as Amatil stated Net Finance Costs had reduced by the very same amount, as a result of The Coca-Cola Co's $US500m equity injection in the Indonesian business.
Amatil knows it must make changes to restore profitability in its biggest market.
Australians are being widely encouraged to minimise consumption of high-sugar content foods and drinks as we find ourselves in the midst of a so-called "obesity epidemic". Calls for a federal sugar tax are becoming louder, and are not that far-fetched as the United Kingdom and areas of the United States have already shown. I wouldn't expect such a tax to be legislated any time soon here. In fact Deputy Prime Minister Barnaby Joyce labelled the idea "bonkers mad", but I wouldn't rule it out for the future.
Amatil still has a long way to go in restoring group earnings growth, but it looks to be on the right track. If the company can successfully rebalance the product portfolio as it intends, I believe it could be a worthwhile investment. I'm waiting on the sidelines for now, but will be interested to see how the turnaround is going when full year results are released on February 22.
