There was a cautious market reaction yesterday to the news that The Coca-Cola Company will invest $US500 million ($A570 million) in Coca-Cola Amatil’s (CCL) Indonesia business, in return for a 29.4% equity stake, news that saw the shares rise 4.5% to $9.07.
That’s a long way from the heady days of the shares of a year ago when the stock hit its 52 week high of $13.01.
But it was the stock’s biggest rise in five years as investors also focused on a forecast of a return to profit growth in 2015 (meaning 2014 is a write-off).
The shares are up around $1 on the 52 week low of $8.19 hit earlier this month as doubts grew about the company’s future in Indonesia and the performance of the Australian operations, which seem to be infected by the same underperformance virus as the US parent is experiencing.
A well leaked (to Fairfax Media) story about the board of Coca Cola Amatil going to the Atlanta HQ of Coke to discuss an Indonesia joint venture, then another well leaked story at the start of this week about a new Coke drink to be released in Australia, put a bottom under the weak CCA price.
The latter story also served as a way of highlighting the impending release of the company wide review by CCA’s new CEO, Alison Watkins.
That occurred yesterday and the market sent the shares higher, with the gains merely restoring the share price to where it was when the weaker than expected interim results were released in August.
CCL 2Y – Coke regains some fizz
Coca-Cola Amatil yesterday announced the heads of agreement with The Coca-Cola Co (TCCC) as part of the review of the local company which will continue the cost cutting already underway and try and restore sales and earnings growth.
The equity stake in Indonesia is in line with TCCC’s 29.4 per cent shareholding in CCA, which said TCCC’s investment would support the accelerated expansion of soft drink production, warehousing and cold drink infrastructure in Indonesia to ensure long-term growth in that market.
CCA said the investment would enable it to broaden its product offering, develop new consumption occasions and offer a greater range of affordable packages.
CCA Indonesia will also transform its route-to-market model to increase availability to the traditional trade and broaden its customer base.
The deal is conditional on CCA shareholder approval at a meeting in February.
Ms Watkins told yesterday’s briefing that CCA’s profits, which have fallen for two years, were expected to return to growth in 2015.
She said the company is aiming to achieve mid-single digit growth in earnings per share over the next few years and wants to pay out about 80% of earnings in dividends while investing around $310 million a year.
(The new earnings growth target is well below the low-double-digit profit growth achieved in eight of the last 12 years, much of which came from cost cutting and price increases, and not market growth).
Ms Watkins’s guidance was in line with current market forecasts. Analysts are see CCA reporting a 22% cent drop in net profit in 2014 to $391 million and a 4.3% rise in profit in 2015 to $408 million.
Ms Watkins also confirmed reports the company will adopt a flatter management structure detailed plans and the details of the three year, $100 million of cost cuts. The savings will be reinvested in brand building and revenue management initiatives in the local market.
"We are confident that the combination of revenue and cost initiatives we have under way will restore the business to growth," Ms Watkins said.
She said CCA has established a new revenue management team in its key Australian business and has signalled significant changes to its strategy, moving away from a focus on volumes and price-led revenue growth to a focus on transaction growth and revenue growth through a better mix of products and prices.
Analysts say poor revenue management and declining service to customers such as takeaway food outlets have cost the company dearly in the past two years.
These customers are in the so-called trade route business which has the highest profit margins of all the businesses, with Coke products sold through tens of thousands of vending machines and cool cabinets at full prices.
CCA will boost its spend on mainstream and digital marketing by 36% to build brand awareness and relevance – especially in the teen market – and will use digital technology to improve service in the route or convenience channel.
CCA is also changing its price structure, although not necessarily reducing prices, even though its products sell at a premium to the Pepsi and other rivals products.
Ms Watkins also reaffirmed CCA’s commitment to SPC Ardmona and CCA’s beer and spirits business. These are considered to be vital to the new mantra from the US company of product diversification Away from the basic carbonated drinks product lines which are increasingly not being consumed at the same rate in the uS.
In fact US consumption of these drinks has fallen to 1995 levels as consumers move elsewhere.
Ms Watkins also confirmed that the company will introduce a so-called value water product to compete in the new price segment under the price levels for its Mount Franklin and other waters.
