Coca-Cola Amatil: You need to pay up CCEP
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 22 January 2021, 9:00 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- Coca-Cola Amatil's (ASX:CCL) 4Q trading and FY20 guidance was materially stronger than expected. In the 2H20, CCL delivered modest earnings growth vs the pcp.
- With volumes recovering as COVID restrictions ease and A$145m of cost savings targeted by FY22, we think the business is well placed in the future.
- We think CCL’s better than expected trading justifies a higher offer price. With the share price trading at a small premium to the offer price, clearly the market agrees.
Better than expected FY20 result
CCL’s preliminary FY20 guidance exceeded our forecasts and consensus. FY20 underlying EBIT was A$550.7m, -13.9% on the pcp and 9.7% better than our forecast of A$502.1m and ahead of Factset consensus (A$508.8m).
Importantly, the business recovered in 2H20 as restrictions eased and underlying EBIT rose 3.2% on the pcp. Underlying NPAT of A$340.3m (-13.6% on FY19A) was also 9.1% ahead of our forecast and a 9.8% beat to consensus.
Pleasingly, CCL delivered its A$140m cost saving target and the balance sheet finished in a strong position, with net debt reducing A$289m on the pcp to A$1,462m (or A$963m ex. AASB16). The result will be reported on 18 February.
Australia and New Zealand drive the beat; costs controlled tightly
The beat reflected a stronger than expected 4Q recovery across Australia (returned to 2H growth) and New Zealand during the important Christmas trading period. The result was delivered despite CCL returning NZ$7.2m in wage stimulus to the New Zealand Government during the 2H (no stimulus benefits in the full year result).
Indonesia and PNG also delivered better than feared results (2H EBIT -9.2% vs. -59.7% in 1H) due to the benefit of strong cost control and A$10.8m in reduced D&A (post the 1H Indonesian asset impairment). We note an extra two trading days in 2H20 added ~A$7-10m to group EBIT.
Material upgrades to our forecasts and valuation
Our FY20/21/22 NPAT forecasts have risen by 9.1%/6.1%/5.2% respectively. Following earnings upgrades, our valuation has risen to A$11.43 from A$10.83 previously. Strong earnings growth over the forecast period reflects a recovery in volumes as restrictions ease and CCL’s A$145m of targeted cost savings by FY22.
CCEP takeover progressing; update will pressure a higher offer
CCL continues to progress with Coca-Cola European Partners (CCEP) takeover offer via scheme of arrangement. A scheme booklet is expected to be sent to shareholders in early March 2021.
Given CCL’s stronger than expected trading update and medium-term earnings benefits from its COVID and ‘Fighting Fit’ cost savings (A$145m cumulative), we think this increases the pressure on the Board to pursue a higher offer from CCEP (login to view target price). We now forecast a final dividend of 26cps, 50% franked.
The offer price now represents only a 11.5% premium to our new valuation. Based on our revised forecasts, the offer price represents an FY20 EV/EBITDA multiple of 12.0x or 9.9x on more normalised earnings (FY22 or post a full recovery from COVID and the delivery of its cost saving target).
Past bottler transactions have been done on about 10-12x EV/EBITDA, with developed countries at lower multiples and emerging countries at higher multiples given their stronger growth profile.
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