High quality, high price

A record first half profit of $212.7 million for Coca-Cola Amatil represented a 12.1% increase on the prior comparable period. Operating earnings (EBIT) increased 10% to $373.8 million. This was another good outcome for the company as the first half year in 2009 had been very strong.

“The Coca-Cola brand remains the dominant non-alcoholic brand in Australia”

On the charts, Coca-Cola Amatil respected support at the 200 period moving average (red line) at $11.22 to trade higher. In the process, it broke above the 50 period moving average (green line) at $11.72, which is a bullish sign. The uptrend in place, coupled with the bullish moving average cross bodes well for a continued move higher to test the all time high of $12.15 in the coming months.

The result was also commendable as the growth was driven by volume and market share gains as well as pricing increases. Total beverage volume for the group increased 1.8% to 257.7 million unit cases, with the average price per unit case increasing from $7.16 to $7.38, or 3.1% per case. That contributed to a total trading revenue increase of 5% to $1.9 billion for the half year.

Amatil lifted its interim dividend from 18.5 cents to 20.5 cents per share, in line with the growth in earnings per share.

The Australian beverage division accounts for almost 70% of group operating earnings. During the period, Amatil experienced volume growth of 1.5% and pricing growth of 3.9% for total trading revenue growth of 5.5%. Some new products and packaging initiatives and increased cold drink cooler placements helped lift operating margin to 19.9%. The company said sales in quick service restaurants and demand for take-home products in the grocery industry had been the primary source of growth.

The Coca-Cola brand remains the dominant non-alcoholic brand in Australia. Over 50% of all such beverages are Coca-Cola drinks but the brand still managed to grow by 3% in the period as it did in the prior period. The brand is still finding new ways to package and present itself which stimulates the growth.

The New Zealand business managed to increase earnings by 5% in local currency terms but this translated into flat earnings growth in Australian dollar terms. Earnings from Indonesia and PNG increased 20% to $18 million as the introduction of one-way packs helped lift volume by more than 10%.

The Food and Services division also had a good half year with EBIT up 13.7% to $47.2 million. SPC Ardmona reported lower revenue after exiting some unprofitable activities, but got some benefit from an improved fruit intake and lower water subsidies.

Amatil’s Pacific Beverages joint venture has been closely watched in recent months as it launched the new $120 million brewery in Newcastle. The JV now accounts for 10% of the premium packaged beer market by volume and value. Pacific Beverages now has 5 brands in the top 20 premium beer brands in Australia. A big expansion in the Peroni and Grolsch brands is expected to continue to lift volume in this sector. The Grolsch brand itself grew by over 40% in the period as it found its way into more retail outlets.

The brewery is still scaling up production and is expected to reach 60% capacity by the end of 2010. The total capacity of the brewery is 50 million litres.

Amatil’s share of the losses in Pacific Beverages this half was $1 million, but the business is still in development phase as the partners reinvest in it.

This division also houses the spirits brands such as Jim Beam and Teachers. The Jim Beam brand remains the number one spirits and alcoholic ready-to-drink brand in Australia.

Outlook

The company says consumer demand and spending is still cautious. Despite that, Amatil has focused heavily on its pipeline of high-returning projects designed to lift efficiency, service and revenue gains across the company.

Project Zero is designed to implement the self-manufacture of plastic PET bottles in all major manufacturing locations. Amatil is investing about $500 million across the group to eliminate empty bottle storage, handling and transport costs by making its own lightweight bottles.

The core focus for the company is on organic growth of its beverage and food businesses. Managing Director Terry Davis, said the company is expecting high single-digit EBIT growth for the second half year. A further trading update will be provided in November.

Financially, the company is in very good shape even as cash flow dipped by 35% to $219.5 million during the period. That reflected higher tax payments as the business received tax refunds of $20 million in the prior period. Fund flows from operating earnings and working capital were both heading in the right direction. The $57.5 million reduction in working capital to $848 million was particularly impressive.

Capital expenditure of $151 million reflected the expenditure in Project Zero and other initiatives.

Total return on capital, however, remains very robust at 24.6%.

Net debt of $1.7 billion was $171 million lower than last year and represents an interest cover ratio of 5.6 times EBIT, within the target range of 4-6 times.

The weekly chart illustrates the strength of the uptrend in place since July 2008. The dynamic 39 week moving average (green line) has successfully offered firm support during mid 2009 to date. Broad upside momentum remains in play, which will assist in the move higher over the longer term.

Summary

Coca-Cola Amatil is trading on a PE ratio of 17.8 times consensus earnings for the year ending 31 December 2010. This falls to 16.4 times in the 2011 financial year for the company. This is a premium rating for a quality company and is comfortably above the market PE around 12 times earnings.

Our conclusion is therefore the same as in our previous note on the company (FAT 474) that we would prefer to buy Amatil at a cheaper price.