Coca-Cola Amatil's wet summer
Recommendation
Coca-Cola Amatil announced a mildly disappointing forecast for the second half ended 31 December 2011.
On a constant currency basis and before significant items (the way we tend to think about this company's progress), management expects to deliver second half net profit growth of around 5%. Shareholders might have hoped for a larger rebound after a tough, rain-affected prior period.
Again, the weather hit sales this period, with another cold and wet start to summer in the east (particularly in New South Wales).
Key Points
- Cool, wet summer and belt-tightening impacting
- Sale of Pacific Beverages is a good outcome
- Amatil might acquire Foster's non-beer businesses
Weak consumer spending was also cited earlier in the period, and your analyst concurs. Accustomed to paying €1 for his weekly 500ml Coke in European vending machines, he'll opt for acute thirst over the $4 charged for 600ml at train station vending machines in Sydney. Greedy buggers.
Fortunately for Amatil, though, other consumers have since loosened the purse strings somewhat since the recent interest rate cuts, with Australian beverage volume growing again since early November.
As previously mentioned, the company announced it will sell its half of the Pacific Beverages beer business to joint venture partner SABMiller for $305m, generating a one-off profit after tax of $165m.
Amatil will be restrained from re-entering the beer business until the end of 2013, although re-entering is exactly what management intends to do. As speculated in The Australian Financial Review, global beer giant Grupo Modelo is unlikely to be happy with competitor SABMiller holding the rights to distribute Corona in Australia (acquired via the Foster's takeover). Amatil is a potential alternative distributor.
The company will soon begin due diligence on Foster's spirits, ready-to-drink and non-alcoholic businesses, as well as its Fijian operations, which it has an option to acquire in whole or part. The cost of this acquisition is likely to fall between $100m and $180m.
Partly offsetting the profit from the Pacific Beverages sale is $105m (after tax) in one-off costs associated with the restructure of SPC Ardmona, which has been a thorn since acquisition in 2005. Upsets aside, our thoughts are little changed from Coca-Cola Amatil: The real thing of 11 Oct 11 (Hold—$11.99). Amatil is a high quality business but, like the product in Sydney's vending machines, it's a little too expensive to buy at the moment. HOLD.