Why the Coca-Cola Amatil Ltd share price could be a turnaround success

The Coca-Cola Amatil Ltd (ASX:CCL) share price is up almost 15% in the last 12 months. 

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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.

Motley Fool contributor Ian Crane has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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