Please refer to page 12 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures . AUSTRALIA CCL AU Underperform Price (at CLOSE#, 17 Jul 2015) A$9.05 Valuation A$ 8.87 - DCF (WACC 8.9%, beta 1.0, ERP 5.0%, RFR 3.8%, TGR 2.1%) 12-month target A$ 9.43 12-month TSR % +9.1 Volatility Index Low GICS sector Food, Beverage & Tobacco Market cap A$m 6,911 30-day avg turnover A$m 20.2 Number shares on issue m 763.6 Investment fundamentals Year end 31 Dec 2014A 2015E 2016E 2017E Revenue m 4,942.8 5,063.0 5,353.4 5,514.3 EBIT m 651.5 659.2 690.8 722.5 Reported profit m 272.1 380.5 401.8 419.2 Adjusted profit m 375.5 380.5 401.8 419.2 Gross cashflow m 642.8 660.3 650.0 677.3 CFPS ¢ 84.2 86.3 84.6 87.9 CFPS growth % -14.9 2.5 -1.9 3.8 PGCFPS x 10.8 10.5 10.7 10.3 PGCFPS rel x 1.23 1.09 1.20 1.27 EPS adj ¢ 49.2 49.7 52.3 54.4 EPS adj growth % -25.4 1.1 5.2 3.9 PER adj x 18.4 18.2 17.3 16.6 PER rel x 1.14 1.08 1.08 1.17 Total DPS ¢ 42.0 42.0 48.5 50.4 Total div yield % 4.6 4.6 5.4 5.6 Franking % 75 75 75 75 ROA % 10.3 10.5 10.4 10.6 ROE % 22.0 22.1 22.1 22.0 EV/EBITDA x 9.5 9.4 9.5 9.2 Net debt/equity % 107.6 59.9 58.7 58.5 P/BV x 4.1 3.9 3.7 3.6 CCL AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July 2015 (all figures in AUD unless noted) 17 July 2015 Macquarie Securities (Australia) Limited Coca-Cola Amatil Industry headwinds strengthening Event We analyse the outlook for CCL ahead of the 1H15 result and in light of challenging operating conditions, a cost out strategy to fund investment in marketing and products development. We transfer coverage from Craig Collie to Bryan Raymond. Impact Operational headwinds intensifying. The Australian CSD industry is facing a number of challenges, resulting in deteriorating sales growth. We see a risk that the beverages industry is likely to move into a period of negative volume and sales growth. As a result, we forecast a -0.5% volume decline and -1.0% price declines in Australia in FY15. This challenging environment is primarily being driven by: Price pressure from retailer competition in order to deliver value to customers. Supplier feedback suggests that WOW has now joined Coles in pushing back on any supplier initiated price increases. CSD volume declines driven by changing consumer preferences away from sugar and artificial sweeteners. Cost out and product development mitigating some downside. CCL is part way through a $100m cost out strategy in order to invest in marketing and product development (Coke Life), and is likely to be margin neutral. Coke Life to take share at a low ROI. Industry feedback at this relatively early stage suggests Coke Life has been underwhelming, however we expect CCL has taken market share as the ‘halo effect’ of the new product and intensive advertising program will drive overall sales above system rates. CCL has stated repeat purchase rates of 22% and unit sales above expectations after the first seven weeks. Valuation not compelling in light of headwinds. CCL is trading at a 14% PER premium to the market, almost one standard deviation below the three year average (19%) and well within the range seen over the past three years. In our view, this apparent valuation discount in part reflects earnings risks (MRE forecasts are 1.6% and 1.1% below consensus in FY15 and FY16). Earnings and target price revision EPS: FY15 -0.8%, FY16 -2.3%, FY17 -2.6%. TP -1.4% to $9.43. Price catalyst 12-month price target: A$9.43 based on a DCF methodology. Catalyst: 1H15 result – 21 August Action and recommendation Downgrade to Underperform. CCL’s key categories are seeing both volume and price headwinds. While CCL is improving efficiency and investing in the business through additional marketing and product development, we consider the headwinds will outweigh the investment being made in the business over the next twelve months. In our view, price pressure remains to the downside through the supermarket channel, as WOW sharpens its view on pricing in what is a critical impulse category.
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Coca-Cola Amatil · Coca-Cola Amatil Industry headwinds strengthening Event We analyse the outlook for CCL ahead of the 1H15 result and in light of challenging operating conditions,
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Please refer to page 12 for important disclosures and analyst certification, or on our website
The volume growth outlook remains challenging for CCL, with feedback from suppliers and
competitors in the grocery and convenience sectors suggesting demand growth is subdued as a
result of the ongoing shift away from CSD’s by increasingly health conscious consumers away
from both high and low calorie CSD’s towards water and natural beverages.
Overall beverages industry (which comprises CSDs, juice, water, energy drinks, cordial, sports
drinks, etc) growth has slowed markedly into 2014, with further declines towards zero expected
into 2015.
Fig 1 The total beverages market has moderated in recent years, with CSD’s pushing 2015 sales growth expectations towards zero
Source: Retail World, Macquarie Research, July 2015
Recent industry feedback suggests the declines in the Australian CSD segment, and cola in
particular, have accelerated over the past six months. The drag from Cola and other CSDs as well
as increased deflation in water is expected to accelerate in 2015, offsetting continued volume
growth in the water, sport and energy categories.
Fig 2 Drag from Cola and deflation in water are expected to accelerate in 2015, offsetting water volume growth as well as traditional growth categories (sport, energy)
Source: Retail World, Macquarie Research, July 2015
Coke Life ROI likely to be low. Despite CCL claiming a successful launch and competitor
feedback regarding CCL increasing their market share in CSDs, the high level of marketing spend
required in the launch of the new Coke Life product is, in our view, unlikely to provide an ROI
materially above the cost of capital.
CCL feedback post launch... CCL has claimed repeat purchases of Coke Life are higher than
Cadbury's popular Marvellous Creations chocolate bars, as 4% of grocery shoppers have tried
Coke Life, with a repeat purchase rate of 22%. This exceeds the 17% repurchase rate of
Cadbury's Marvellous Creations range, widely regarded as one of the most successful new
products launched in Australia for many years.
After its first seven weeks, sales volume for Coke Life is ahead of CCL expectations and in line
with those for Coke Zero, based on the number of packs sold rather than litres sold. While fewer
litres have been sold, this is due to CCL’s strategy to limit the initial range to smaller pack sizes.
CCL plans to launch larger Coke Life packs, including two-litre bottles and 24-can packs, over the
next few months. Volume has not been discount driven: “YTD average prices per litre are identical
to this time last year ... and there hasn't been undue discounting.”
Feedback suggests Coke Life has driven improved CCL market share. While feedback has
been mixed on the overall success of Coke Life, we expect CCL has gained market share in the
CSD category post the Coke Life launch, driven by the level of marketing investment.
Below are some key charts from a recent Macquarie survey regarding consumer’s attitudes
towards the new Coke Life product. A full copy of the research can be accessed here: Coca-Cola
Amatil - Life passes the taste test.
Fig 25 Blind taste test shows consumers prefer Life over Zero but Original still the favourite
Fig 26 85% of survey participants were not attracted to the concept of Coke Life
Source: Company Data, Macquarie Research, July 2015 Source: Macquarie Research, July 2015
48%
17%
33%
Original Coke Coke Zero Coke Life
15%
85%
Yes
No
Do you find the concept of Coke Life appealing?
Macquarie Wealth Management Coca-Cola Amatil
17 July 2015 9
Valuation not compelling in light of demand outlook
CCL has de-rated as volume and price growth dissipated across the category post 2012. The
average PERel has declined from ~30% from 2010 – 2012 to 19% from 2013 – 2015. This has
coincided with lower revenue growth and declining earnings. This softer demand growth and
pricing outlook has been underpinned by changing consumer preferences towards CSD’s, and
supermarket pushback to suppliers in response to any proposed price rises respectively.
These headwinds are intensifying in our view, with industry feedback suggesting CCL’s key
categories are under increasing pressure in 2015, with further material volume and price
headwinds expected across the sector as supermarkets increase focus on price.
Given these headwinds, we do not consider the current valuation as compelling. CCL is trading at
a 14% PER premium to the market, one standard deviation below the three year average (19%)
and within the range seen over the past three years. In our view, this apparent ~5 PEpt valuation
discount in part reflects earnings risks (MRE expectations are 1.6% below consensus in FY15 and
1.1% below consensus in FY16).
Fig 27 Drag from Cola and deflation in water are expected to accelerate in 2015, offsetting water volume growth as well as traditional growth categories (sport, energy)
Source: Factset, Macquarie Research, July 2015
The share price declines in recent years have clearly been driven by earnings, with little PER de-
rating seen over the past 18 months despite a significant reassessment of earnings. Indeed, the
PER re-rate already began over the past six months as investors became more confident in the
outlook for Coke Life and the cost out trajectory.
Fig 28 The share price decline through 2013 and 2014 almost entirely earnings driven – CCL has not materially de-rated despite weakening conditions
Source: Factset, Macquarie Research, July 2015
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.00
1.10
1.20
1.30
1.40
1.50
1.60
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
PERel (12m fwdvs. ASX200)
PERel (12m fwdvs. ASX200)
+1 St Dev
Average
-1 St Dev
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
12m fwd PER (YoY % change)
12m fwd EPS (YoY % change)
Share price (YoY % change)
Macquarie Wealth Management Coca-Cola Amatil
17 July 2015 10
Source: Company data, Macquarie Research July 2015
Coca Cola Amatil Ltd (CCL)
Year ended 30 June $m 1H14 2H14 2014 1H15e 2H15e 2015e 2016e 2017e
Net Debt $m 1,814.4 1,272.1 1,413.3 1,413.3 1,454.9 1,501.2
ND:ND+E % 51.8% 0.0% 0.0% 37.5% 37.0% 36.9%
Net debt: EBITDA x 2.0 0.0 0.0 1.5 1.6 1.6
Interest Cover x 5.3 0.0 0.0 6.1 6.9 7.1
Macquarie Wealth Management Coca-Cola Amatil
17 July 2015 11
Macquarie Quant View
The quant model currently holds a neutral view on Coca-Cola Amatil. The
strongest style exposure is Profitability, indicating this stock is efficiently
converting its investments to earnings as proxied by ratios such as ROE,
ROA etc. The weakest style exposure is Price Momentum, indicating this
stock has had weak medium to long term returns which often persist into
the future.
Displays where the
company’s ranked based on
the fundamental consensus
Price Target and
Macquarie’s Quantitative
Alpha model.
Two rankings: Local market
(Australia & NZ) and Global
sector (Food Beverage &
Tobacco)
288/472 Global rank in
Food Beverage & Tobacco
% of BUY recommendations 38% (3/8)
Number of Price Target downgrades 0
Number of Price Target upgrades 0
Macquarie Alpha Model ranking Factors driving the Alpha Model
A list of comparable companies and their Macquarie Alpha model score
(higher is better).
For the comparable firms this chart shows the key underlying styles and their
contribution to the current overall Alpha score.
Macquarie Earnings Sentiment Indicator Drivers of Stock Return
The Macquarie Sentiment Indicator is an enhanced earnings revisions
signal that favours analysts who have more timely and higher conviction
revisions. Current score shown below.
Breakdown of 1 year total return (local currency) into returns from dividends, changes
in forward earnings estimates and the resulting change in earnings multiple.
What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s
returns over the last 5 years.
A more granular view of the underlying style scores that drive the alpha (higher is
better) and the percentile rank relative to the sector and market.
Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])
Fu
nd
am
en
tals
Quant
Local market rank Global sector rank
Attractive
-1.2
-0.2
-0.1
0.0
0.1
0.4
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Metcash
GrainCorp
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Metcash
GrainCorp
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
Valuations Growth Profitability Earnings
Momentum
Price
Momentum
Quality
-0.4
-0.5
-0.7
0.1
-1.1
-0.4
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Metcash
GrainCorp
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
-70% -50% -30% -10% 10% 30% 50% 70%
Metcash
GrainCorp
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return
-24%
-22%
-21%
-20%
20%
20%
22%
23%
-30% -20% -10% 0% 10% 20% 30%
⇐ Negatives Positives ⇒
Non-current Assets Inc.
Operating Accruals
EPS Growth FY1
Capex Growth
Asset Turnover
Price to Earnings FY0
Change in Cash FY0
PE Growth FY1
0 1
Technicals & TradingRisk
LiquidityCapital & Funding
QualityPrice Momentum
Earnings MomentumProfitability
Growth
ValuationAlpha Model Score
-0.22-0.02
-1.42 0.26
-0.15-0.42
0.20 0.27-0.36
-0.06-0.05
0 1
Normalized
Score
0 50 100
Percentile relative
to sector(/472)
0 50 100
Percentile relative
to market(/412)
Macquarie Wealth Management Coca-Cola Amatil
17 July 2015 12
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 30 June 2015
AU/NZ Asia RSA USA CA EUR
Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients)
Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients)
Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients)
CCL AU vs ASX 100, & rec history
(all figures in AUD currency unless noted)
Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, July 2015
12-month target price methodology
CCL AU: A$9.43 based on a DCF methodology
Company-specific disclosures: CCL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Coca-Cola Amatil Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.
Date Stock Code (BBG code) Recommendation Target Price 23-Apr-2015 CCL AU Neutral A$9.70 30-Oct-2014 CCL AU Neutral A$9.20 21-Oct-2014 CCL AU Neutral A$8.40 20-Aug-2014 CCL AU Underperform A$8.80 09-Jul-2014 CCL AU Underperform A$9.10 11-Apr-2014 CCL AU Neutral A$10.30 19-Feb-2014 CCL AU Neutral A$12.15 13-Nov-2013 CCL AU Neutral A$12.71 05-Nov-2013 CCL AU Neutral A$12.76 20-Aug-2013 CCL AU Neutral A$12.98 07-May-2013 CCL AU Neutral A$13.24 19-Feb-2013 CCL AU Neutral A$14.40 22-Aug-2012 CCL AU Neutral A$13.99
Target price risk disclosures: CCL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.
Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group
Macquarie Wealth Management Coca-Cola Amatil
17 July 2015 13
Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.