The Coca-Cola Amatil Ltd (ASX: CCL) share price rose 7% to $10.57 this morning, after management reported respectable growth in earnings per share and announced a buyback. Here's what you need to know:
- Revenues rose 1.3% to $5,253 million
- Net profit after tax (NPAT) fell 37% to $246 million
- Underlying NPAT rose 6.2% to $418 million, excluding SPC Ardmona impairment
- Earnings per share (excluding impairments) of 54.7 cents per share
- Dividends of 46 cents per share, franked to 75%
- Outlook for mid-single-digit earnings growth, payout ratio above 80%, and 'strong balance sheet and return on capital employed'
- Up to $350 million buyback over the next 12 months
So What?
A strong year for Coca-Cola Amatil – or at least, it was a lot better than 2015. The Australian beverages segment continues to struggle, with revenues falling 3.4% and volumes down 2.1%. Although water remains a bright spot, and management successfully delivered the forecast $100 million in cost savings. However, this business is expected to face continued headwinds.
On the plus side, business elsewhere is buoyant. New Zealand and Fiji are growing strongly and Amatil's plant in Suva is adding a further production line in the near future. Indonesia and PNG reported a cracking result, growing Earnings Before Interest and Tax (EBIT) 52% in constant-currency terms, while Alcohol & Coffee also performed strongly, with EBIT up 31%.
Management also announced a $350 million buyback over the next 12 months, buying back up to 4.6% of the company's issued capital. Now, readers should bear in mind that a fair chunk of profit growth in recent times has come through lower interest expenses, due to parent The Coca-Cola Company's $500 million equity injection.
The buyback will reverse some of that benefit, but fewer shares on issue will confer long-term benefits to shareholders, especially since the company is paying down debt. Management assures shareholders that they retain the funding capacity for 'strategic initiatives', such as the previously planned $500 million investment in Indonesia.
Now What?
On the whole I thought it was a solid result for Coca-Cola. I probably sold my shares too soon, and feel rather foolish (lower case 'F') writing this article. The Alcohol + Coffee and Indonesia + PNG segments have now become large enough that they can contribute meaningfully to the company's result, more than offsetting the potential for further modest declines in the Australian beverages market.
The Australian market at large remains challenging, although management has a few more tricks up their sleeve with the closure of one facility, installation of more automated equipment at another, and sale and lease back of a factory. Amatil delivered its highest free cash flows in over a decade, socking away $490 million for a rainy day.
Unfortunately I recently lost my Discounted Cash Flow (DCF) valuation for Amatil in a computer crash, although from what I recall the Australian beverages result was slightly worse than forecast, while Indonesia and Alcohol grew much quicker than expected. I'd also expected that $500 million would be invested in Indonesia instead of being used for the $350 million buyback – but a buyback is not a bad outcome.
Thus I would feel confident standing behind my valuation, which previously suggested Amatil was worth around $11 to $12 per share. I consider the company to have a reasonable margin of safety at prices of around $9.50 per share.
