Coca-Cola Amatil: Interim result 2016

Coca-Cola Amatil's half-year results, released last month, contained a 3% increase in revenue and an 8% increase in net profit, but those figures disguised some worrying trends.

The 8% profit lift might sound OK, but much of it was due to lower finance charges (due to lower interest rates and reduced debt thanks to The Coca-Cola Company's investment in the Indonesian business), cost reductions and a minor recovery in Indonesia.

Meanwhile, the worrying trends – which we described in Coca-Cola Amatil's Big headache in July – accelerated. In Australian Beverages, the company's largest and most important division, revenues fell 4%. Particularly concerning was that the volume of sparkling beverages fell 6% in the first half (after being flat in the year to 31 December 2016). That people are drinking much less Coca-Cola is now indisputable.

Thankfully management managed to slash costs, containing the operating profit decline in the Australian Beverages division to 2%. Had costs been flat, earnings would have fallen 22%. There is only so much cost-cutting a company can do –  eventually declining revenues will crunch profitability.

At the moment, cost-cutting and earnings growth from smaller divisions are supporting Coca-Cola Amatil's overall profitability. But, with the stock gaining 9% since our July review, we're concerned the market is too focused on the 8% half-yearly earnings increase and not paying sufficient attention to the worrying trends in Australian Beverages. Perhaps Indonesian growth will offset weakness from Australian Beverages in the years ahead but we don't want to count on it.

The stock is trading on a 2016 prospective price-earnings ratio of 19, which is starting to look expensive given the potential earnings downside if Australian revenues keep declining. We're approaching a downgrade to Sell but the stock remains a HOLD for now.