Coca ColaAmatilLimited 10 Jan 2013 2230 1

8/17/2019 Coca ColaAmatilLimited 10 Jan 2013 2230 1

1/18

Equities: Coca-Cola Amatil Limited10 January 2013 ASX Code: CCL Food & Beverage

Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and atww.research.commbank.com.au. This report is published, approved and distributed solely by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CBA is not

egistered as a broker-dealer under the U.S. Securities Exchange Act of 1934 and is not a member of the Financial Industry Regulatory Authority, Inc. or any U.S. self-regulatoryrganization .

Andrew McLennan T. +612 9118 1199E. [email protected]

Sam Teeger, CFA T. +612 9118 1184E. [email protected]

Blame it on Mother

Event

We consider the positive impact of Bureau of Meteorology (BOM) weatherforecasts and the negative impact of the continuing colonisation of shelfspace by Energy drinks. The latter appears more crucial for CCL’s earningsoutlook.

Implication

Weather improving, but has failed to shine on CCL . BOM is no longerforecasting an El Niño to develop this year, however the weather hasnormalised against the damp and cold summer of 2011/12. This should be apositive driver of high-margin convenience products and chilled single-servebeverages. CCL’s 12 December 2012 downgrade suggests other structuralfactors are at play.

Carbonated drinks losing share across channels to Energy. Our channelchecks suggest that carbonated soft drinks are continuing to lose fridgespace in supermarkets and convenience channels. The shelf space is beinglost predominantly to Energy drinks (a category which CCL is relativelyweaker in), putting CCL’s high-margin single-serve/convenience sales at risk.

Adverse earnings impact could be much stronger than sales impact. Thehigher-margin convenience/single-serve products are a greater risk for CCLfrom the expanding market share of Energy drinks. This suggests adisproportionate impact on earnings compared with sales – possibly wellbeyond our expectations.

Pricing in perfect weather? The recent share price spike coinciding with theheat wave overcapitalises a short-term weather event and presents a goodopportunity to sell the stock.

Earnings and valuation revisions

We have downgraded CY13 EPS by -3.0% and CY14 by -7.7%. Valuation-1.2% $12.50; Price target -1.1% to $13.20.

Figure 1: Earnings and valuation revisions

FY12f FY13f FY14f

New Old Change New Old Change New Old Change

NPAT ($m) 554.4 554.4 0.0% 582.9 601.0 -3.0% 610.4 661.1 -7.7%

EPS (cps) 72.9 72.9 0.0% 76.6 78.9 -3.0% 80.2 86.8 -7.7%

Source: CBA estimates

Investment view

Heightened risk to earnings demands multiple reduction. CCL’s earningshave become more sensitive due to its exposure to higher-margin formats,which are now threatened by Energy drinks. Consequently, CCL’s 12%premium to market is unsustainable at current levels. We downgrade ourrecommendation to Underweight.

Underweight (from Neutral)Price target $13.20 (from $13.35) Share price $13.8052-week range $11.47 - $14.08Forecast price return -4.3%Forecast dividend return 4.3%Forecast total return -0.1%Market cap $10,517m

Forecasts and ratios

Year end Dec 10 11 12f 13f 14f

EBIT $m 845 869 890 932 983NPAT $m 507 532 554 583 610

EPS c 68.2 70.2 72.9 76.6 80.2EPS Growth % 12.8 2.9 3.8 5.1 4.7

P/E x 15.9 16.4 18.5 18.0 17.2EV/EBIT x 11.7 12.1 13.5 13.2 12.6DPS c 48.5 52.5 55.0 59.0 65.5Dividend Yield % 4.5 4.6 4.1 4.3 4.7Franking % 100 100 100 100 100

Price relatives Starting index and share price rebased to 100

94.096.098.0

100.0102.0104.0106.0108.0

110.0112.0114.0116.0118.0120.0

Jan 12 Apr 12 Jul 12 Oct 12

S&P/ASX 200 CCL


2/18

Global Markets Research

Equities: Coca-Cola Amatil Limited

2

Financials

Source: Company data, CBA estimates

Profit & Loss FY10 FY11 FY12f FY13f FY14f Company InformationRevenue 4609 4856 5185 5538 5943 Financial Year End Date

Expenses 3574 3783 4070 4360 4697 Share Price

Associates 1.5 0.9 0.0 0.0 0.0 Price TargetEBITDA (inc assoc) 1036.8 1074.1 1114.5 1177.8 1245.8 Valuat ionDepreciation & Amort 191.9 205.2 224.9 245.4 262.6 Recommendation

EBIT 844.9 868.9 889.6 932.5 983.2Net Intere st 1 34 .4 127.8 11 0.3 111.5 1 23.5 Operating Metrics (%) FY10 FY11 FY12f FY13f FY14fProfit Before Tax 710.5 741.1 779.3 821.0 859.7 EBITDA margin 23.1 22.4 21.6 21.4 21.1Tax 203.9 209.1 224.9 238.1 249.3 EBIT margin 18.8 18.1 17.3 16.9 16.6

Minorities 0.0 0.0 0.0 0.0 0.0 ROIC (NOPLAT) 17.7 17.0 16.4 16.4 16.5

NPAT 506.6 532.0 554.4 582.9 610.4 Return on Equity 29.5 27.5 26.3 25.9 25.4Specific Items -9.3 59.8 0.1 0.0 0.0 OCF pre I&T / EBITDA 87 90 92 99 95

Reported Profit 497.3 591.8 554.5 582.9 610.4 Net Debt (m) 1689.4 1742.9 1768.1 1791.9 1853.7Other 0.0 0.0 0.0 0.0 0.0 Net Debt / EBITDA (x) 1.6 1.6 1.6 1.5 1.5

CBA Profit 506.6 532.0 554.4 582.9 610.4 Net Debt / Net Debt + Equity 48.0 46.1 44.8 43.5 42.9EBITDA interest cover (x) 6.7 7.7 7.7 8.6 8.4

Growth Rates (%) FY10 FY11 FY12f FY13f FY14f Effective Tax Rate 28.8 28.2 28.9 29.0 29.0

Sales 1.2 6.9 7.3 6.9 7.4EBITDA 7.7 3.6 3.8 5.7 5.8 Per Share Data (c) FY10 FY11 FY12f FY13f FY14fEBIT 7.3 2.8 2.4 4.8 5.4 EPS Shares (m) 742.9 758.1 760.9 761.3 761.3

Normalised EPS 12.8 2.9 3.8 5.1 4.7 Reported EPS 66.9 78.1 72.9 76.6 80.2

Normalised EPS 68.2 70.2 72.9 76.6 80.2

Balance Sheet FY10 FY11 FY12f FY13f FY14f Dividends 48.5 52.5 55.0 59.0 65.5Liquid Assets 385 665 935 1012 950 Dividend Yield (%) 4.5 4.6 4.1 4.3 4.7

Net Receivables 772 864 851 896 967 Payout Ratio (%) 71.1 74.8 75.5 77.1 81.7

Inventories 735 752 757 794 856 Franking (%) 100.0 100.0 100.0 100.0 100.0

Other 95 363 111 111 111 Free Cash Flow Yield (%) 2.6 3.1 4.3 3.8 3.9

Current Assets 1987 2644 2654 2813 2884 Net Tangible Assets 46 69 85 106 124Investments 75 0 123 123 123 Book Value 243 268 286 306 324

Property, Plant & Equipment 1595 1772 1954 2126 2266

Net intangibles 1489 1507 1525 1526 1526 Multiples (x) FY10 FY11 FY12f FY13f FY14fOther 132 105 110 110 110 Enterprise Value (m) 9906.1 10487.8 12007.8 12298.1 12359.9

Non Current Assets 3291 3385 3712 3885 4025 EV / Sales 2.2 2.2 2.3 2.2 2.1Trade Creditors 569 736 776 842 911 EV / EBITDA 9.6 9.8 10.8 10.4 9.9

Borrowings 127 108 226 226 126 EV / EBIT 11.7 12.1 13.5 13.2 12.6

Provisions 165 145 105 114 121 Reported P/E 16.2 14.7 18.5 18.0 17.2

Current Liabilities 1202 1388 1480 1556 1532 Normalised P/E 15.9 16.4 18.5 18.0 17.2Borrowings 1944 2300 2478 2578 2678 PEG 5.5 4.3 3.6 3.8 5.1

Provisions 202 166 169 169 169

Non Current Liabilities 2242 2606 2710 2810 2910 Segment EBIT ($m) FY10 FY11 FY12f FY13f FY14fShareholder Capital 2180 2218 2239 2239 2239 Australia Beverages 593 607 623 634 653

Retained earnings -289 -76 64 221 355 New Zealand & Fiji 81 80 67 70 76

Other -58 -108 -128 -128 -128 Indonesia & PNG 75 88 105 130 152

Total Equity 1833 2034 2175 2332 2467 Alcohol, Food & Services 94 93 95 98 102

Cash Flow FY10 FY11 FY12f FY13f FY14f Currency Assumptions FY10 FY11 FY12f FY13f FY14fOperating Profit 899 966 1022 1161 1182 AUD/NZD (P&L) 1.27 1.31 1.27 1.26 1.26

Dividends Received 0 0 0 0 0 AUD/IDR (P&L) 8361 9058 9333 9319 9360

Net Interest Received -137 -118 -125 -111 -123

Other operating -177 -206 -208 -229 -242 Credit MetricsOperating Cash Flow 585 642 690 821 817Capex -373 -361 -457 -418 -403

Payments for Investments

Other investing -12 -14 226 0 0

Investing Cash Flow -385 -375 -231 -418 -403Capital Raisings 2 3 0 0 0

Dividends Paid -260 -344 -394 -426 -476

Net Borrowings -419 349 202 100 0

Other financing 0 0 0 0 0

Financing Cash flow -678 9 -192 -326 -476Total Cash Change -481 283 271 76 -62

Cash at End of Year 382 665 935 1012 950

31 Dec

13.80

13.2012.50

Underweight

BBG

DJSHVN

JBHMTS

MYR

PBG

PMV

WESWOWCCL

TWE

GFF

0x

1x

2x

3x

4x

5x

0 0.05 0.1 0.15 A

d j . G r o s s D e

b t

/ E B I T D A

Dispersion of EBITDA (12-month forward) (x 100 = %)


3/18



3

Weather impact – a short-term positive, being diluted

El Niño off the cards, but weather has improved

The Bureau of Meteorology (BOM) recently updated its fortnightly El Niño-Southern Oscillationwrap-up. BOM no longer forecasts that an El Niño will develop this year.

BOM’s outlook confidence is related to how consistently the Pacific and Indian oceans affectrainfall. After hovering around El Niño thresholds during winter, tropical Pacific temperatures haveretreated to neutral levels over the past few months. Climate models surveyed by BOM suggestsea surface temperatures in the tropical Pacific Ocean are likely to stay at neutral levels duringearly 2013.

This means that in contrast to the two prior summers, Australian rainfall and temperatures areunlikely to be strongly influenced by ENSO. Given current conditions and outlooks, this will be thefirst ENSO-neutral summer since 2005–06.

As has been seen recently, the wet and cold conditions of the prior two summers have not beenrepeated in 2012.

Figure 2: Southern Oscillation Index (SOI)

Source: BOM, CBA

Weather has been and should remain a net positive for carbonated soft drinks…

Even before the current heat wave, temperatures have been moving up in Australia. BOM datashows the averages for the quarter to December in Australia are running a couple of a percentabove average. BOM anticipates above-average temperatures to prevail over the March quarter,particularly along the eastern seaboard.

Rainfall experienced over the December quarter has been below average on the eastern seaboardand above average in the less populated west. BOM expects this regional skew to continue overthe March quarter, with the eastern seaboard to continue to experience above-averagetemperatures.

-30

-20

-10

0

10

20

30

Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12

SOI


4/18

Glob

Eq

Fig

Sou

Fig

Sou

Thedowdesweasugothe

al Markets Res

ities: Co

re 3: Mean t

ce BOM

re 5: Rainfal

ce BOM

act that CCngraded earite this suppher conditioests there mr factors at p

earch

a-Cola A

emperature

l anomaly, D

…b

Prior‘norsugg

Thesmarsupoffse

Wemar

hasingsortives

ay belay

atil Limi

anomaly, De

ec quarter 2

t failed to

to CCL’s 12alisation’ of

est the weat

e are positivin chilled sinortive weathtting the po

uspect theset, or indire

ed

c quarter 20

012

shine in 2

December 2weather con

her has actu

trends for tgle-serve beer conditionsitive weather

issues aretly, from the

12 Figu

Sour

Figu

Sour

12 for CC

012 downgrditions overlly been hot

he sale of caverages. The suggests th impact.

irectly relateresponse fro

re 4: Median

ce BOM

re 6: Median

ce BOM

de, our expthe next 12er and drier

rbonated sof fact that CCere may be

d to the strum CCL to mi

max tempe

rainfall fore

ctations foronths. Rece

n the more

drinks (CSL has downgther factors

tural changigate these

rature forec

cast, Mar qu

CCL were bnt updates fopulated reg

), particularlraded earnin

at play, whic

taking placadverse tren

st, Mar qua

arter

sed on aom BOMions of Aust

the higher-gs despite t are more th

in the beves.

4

ter

alia.

isan

age


5/18



5

Coke Amatil running out of Energy?

We have performed a top-down analysis of the beverage industry where we have analysed trendsfor the major beverage categories. Our key conclusions are:

1. The Energy drinks category continues to outperform the wider beverage sector.2. In recent years, Energy has increasingly penetrated the convenience sector. We expect this

trend to continue. We also expect the single-serve supermarket channel (which CCL hasdeveloped successfully) to become increasingly penetrated by Energy.

3. The single-serve supermarket channel and the convenience channel are both highly importantto CCL, given they generate significantly higher margins relative to the in-home supermarketchannel.

Background on the beverage and energy drink market

The Australian beverage market is served through the supermarket and convenience retailchannels and the hospitality service channel. Our analysis looks primarily at the retail channels,which represent at least 70% of the total non-alcoholic beverage market, by value.

In 2012, Australian non-alcoholic beverage sales through supermarkets were estimated at $3.62band $660m though the convenience channel. The value of sales picked up in 2012, mostly due toprice and mix growth, rather than volume growth.

Figure 7: 2012 beverage sales, Supermarket channel Figure 8: 2012 beverage sales, Convenience channel

Source: Retail World, CBA Source: Convenience World, CBA

In volume terms over 2012, the supermarket channel accounted for approximately 2.14b litres ofbeverage sales, whereas the convenience channel accounted for relatively modest 126m litres.This implies average revenue per litre of $1.69 through the supermarket channel, compared to$5.23 per litre through the convenience channel.

Clearly, the convenience market is capable of achieving a vastly higher average selling price(ASP) than the take-home product (which represents the majority of sales throughsupermarkets). This is an important fact, which CCL has taken full advantage of in recent yearsto expand margins through a chilled single-serve/convenience offer with the supermarketchannel. This previous success also creates a risk to CCL as the Energy category colonisesthe high-value and high-margin channels to market.

The Energy market has been high growth for a number of years and, based on global trends andlocal market feedback, will continue to take share over the medium term. Energy represents arelatively modest 8.5% of value within the supermarket channel, equating to $306m in annual

sales.

8.5%

56.3%

7.8%

3.8%

15.1%

.6%

2.9%4.1%

Energy

Soft drinks

Still water

Sports

Fruit

Tea

Mineral waters

Mixers

35.4%

31.5%

15.7%

9.0%

4.7%

2.2%1.0% 0.5%

Energy

Soft drinks

Still water

Sports

Fruit

Tea

Mineral waters

Mixers


6/18



6

Energy continues to outperform the wider beverage sector

For a number of years, Energy drinks have been the darling of the soft drink category with strongunit growth over consecutive years. While this is reason enough for retailers to allocate shelfspace to Energy drinks, the story becomes more compelling when we consider the impact of

ASPs.Energy drinks have a much higher ASP compared to other CSD products, even on a chilled,single-serve basis. Unit growth, high ASP and higher sales productivity provide three hugeincentives for the supermarket and convenience channels to allocate more and more space toEnergy drinks, and we believe this is becoming significant enough to detract from CCL’s salesand earnings growth ambitions.

Figure 9: Price per litre trends

Price per litre(2010)



Price per litre(2011 change)

Price per litre(2012 change)

CategoryIn home 1.44 1.48 1.50 3.2% 1.2%

Single-serve 3.97 4.18 4.28 5.4% 2.4% Energy categoryEnergy (total) 6.84 6.31 6.35 -7.7% 0.5%Energy single-serve 7.02 7.19 7.33 2.5% 1.9%

Source: Retail World, CBA

It should come as no surprise that our channel checks suggest CSDs are continuing to lose shelfand fridge space in supermarkets and convenience channels to Energy drinks. This is consistentwith recent trends in industry data (as shown in Figure 10) and global beverage trends.

Figure 10: Market share changes between 2010 and 2012 (supermarket channel)


CCL is adversely affected by structural change towards energy

Shelf space is being lost to categories which CCL is relatively weaker in such as energy drinks,mineral water, iced tea and still water. This loss of space is more significant to CCL’s earningsthan the category numbers suggest, once the impact on higher-margin single-serve market istaken into account.

-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

Soft drinks

Fruit juice

Energy drinks

Still wtaer

Mixers

Sports drinks

Mineral waterTea


7/18



7

Figure 11: CCL market shares in key beverage categories (supermarket channel)


CCL is the number #3 player in Energy, but it is losing share

The leader in the energy drink segment is Frucor (owned by Japan’s Suntory) which produces V,closely followed by Red Bull. CCL is the third player through Mother and Powerade Fuel+.However, over the last two years, CCL conceded market share to Frucor and Schweppes, thelatter having the Australian distribution licence for Monster Energy. The ‘Other’ players, includingRockstar energy drink and Wicked energy drink, are also capturing market share.

Figure 12: Energy drink sector market shares 2012(supermarket channel)

Figure 13: Energy drink sector market share changes2010 to 2012 (supermarket channel)

Source: Retail World, CBA Source: Retail World, CBA

The big prize: The single-serve supermarket channel

Single-serve drinks have significantly higher price points than take-home packs, on a per-litrebasis. The higher price point is partly driven by the cost of making a single-serve product andpartly due to being refrigerated and conveniently located close to the cashier, which provides adifferentiated product available for immediate consumption, similar to that found in theconvenience channel. The higher price points generate materially higher gross profit dollarscompared to take-home packs.

Supermarket single-serve market as large as convenience channel

The materially higher gross profit dollars in the single-serve market has enabled CCL to effectivelyexpand the size of the single-serve market and materially enhanced ASP and margins for CCL

63%35%

14%

53%

18%

37%

97%

65%87%

47%

82%

0%

20%

40%

60%

80%

100%

Soft Drinks Fruit Juice Still water Tea Sports Drinks Energy

CCL Share Other Share

3.5% 8.4% 6.0% 16.6%5.3%-0.5%

2 yea r CAGR 2010 - 2012)

Frucor,35.5%

Red Bull,33.4%

CCL,18.0%

Schweppes, 7.5%

Lucozade,1.3%

Other,4.1%

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

Frucor

Red Bull

CCL

Schweppes

Lucozade

Other


8/18

Glob

Eq

al Markets Res

ities: Coearch

a-Cola A

(andper

Esserival

in 20supe

Figu

Sour

Sup

In resupe17.4

Figu

Sour

Thissinglsinglstro

0.0

0.51.0

1.5

2.0

2.5

3.0

3.5

atil Limi

the supermquare metre

ntially, CCLthe traditio

12, the singlrmarket bev

re 14: Retail

e: CBA

rmarket sin

cent years, trmarket cha

in 2012 (fr

re 15: Single

: Retail Wor

above-mentie-serve come-serve chag position in

2.81

2010

I

ed

rket) in the popportunitie

as createdal convenien

-serve markrage sales,

beverage sa

le-serve ch

e single-sernel. As a re

om 16.4% in

-serve penet

l , CBA

oned trend ipared to a 4nel, Energythe single-s

0.55

alue ($b)

In home (LHS)

rocess. It has to the retail

conveniencce channel.

et within ther $629m.

les, by chan

nnel outper

e market hault, the pene 2010).

ration incre

isolation is.7% marketas been grorve market

2.

20

Singl

also enableler.

e offering witCompared t

supermarket

nel and func

forming in h

s been outpetration of sin

sing

a positive forshare for thewing significut relatively

8

0.58

1 Value ($b)

serve (LHS)

d retailers to

hin the supe the conveni

channel acc

ion

me channel

rforming thegle-serve be

CCL, given i in-home catntly. This is

weaker posit

Single

generate gr

rmarket chaence channe

ounts for 17.

l

in-home maerages has i

it has a 52.4egory. Howea negative foion in the En

2.99

0.63

2012 Value ($b

serve penetrati

ater gross p

nel that nowl sales of $6

4% of total

ket in thencreased to

market shver, within thr CCL givenergy market.

16.

16.

17.

17.

18.

)

ion (RHS)

8

rofit

0m

re ineits

0%

5%

0%

5%

0%


9/18



9

Figure 16: Energy is a significant part of the single-serve market, but growth stabilising


As CCL and the supermarkets developed the chilled, single-serve category, it enabled asignificantly positive mix shift towards vastly higher ASP formats. In 2012, a litre of ‘take-home’beverage achieved an ASP of $1.50, compared to a single-serve price per litre of $4.28.

Single-serve supermarket channel now at risk to Energy

Energy drink sales within the convenience channel represent 35.4% of beverages and are nowexceeding the CSD by value.

Despite the reduction in Energy’s penetration rate of single-serve in 2012, we are confident fromindustry feedback and global trends that the increase in penetration will continue.

We estimate energy drinks represent 22.3% of single-serve supermarket channel. We expect thisto increase to 39.3% by 2020, given the higher ASP and gross profit dollars (GPD) are strongincentives for supermarket retailers to allocate greater space to Energy (at the expense of CSD),particularly in the highly profitable refrigerated shelf space previously dominated by CCL’s brands.

In its most recent conference call, management at Monster Beverage Corporation (MNST.US)indicated that Energy now has more than 26% of the convenience beverage channel in the US.This is clearly a global trend towards Energy drinks.

CCL’s massive market share in Australia (57.7% of CSD, 80.8% of cola in supermarkets, and46% and 91.5% respectively in convenience) makes CCL’s earnings more susceptible to thegrowth of Energy drinks.

Energy a more lucrative option than CSD

MNST is a publicly-listed beverage corporation specialising in Energy drinks. We have comparedthe operating metrics between MNST and CCL to determine the difference in metrics at theproduct level and group P&L.

Figure 17: Comparative metrics, per case (AUD)

Per case metrics MNST CCL Aust

Revenue 9.85 8.52Cost 7.21 6.73EBIT 2.64 1.79


On a per-case basis, in 2011, MNST generated $9.85 per case in wholesale revenues and $2.64 inEBIT. This infers a total cost (COGS and CODB) of $7.21 per case.

In contrast, in 2011, CCL’s Australian division generated $8.52 in revenue per case and $1.79EBIT. Cost per case for CCL Australia was $6.73. While inputs, scale and distribution modelsdiffer between the CCL and MNST, the key reason for the greater EBIT at MNST is higher grossmargin.

0.11 0.13 0.14

0.44 0.450.49

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

0.0

0.2

0.4

0.6

0.8

2010 Value ($b) 2011 Value ($b) 2012 Value ($b)

Energy SS (LHS) Single serve - ex energy (LHS) Energy SS penetration (RHS)


10/18



10

We are confident the stronger margins at MNST are a more extreme demonstration of the relativeprofitability between convenience/single-serve and take-home formats. While our data cannotconfirm margins at retail level, industry feedback suggests the margin % available on Energydrinks are also larger for retailers.

Figure 18: Comparative profit metrics, 2011MNST.US CCL group CCL Aust

Sales 1703 4801 2880.7GP 894 2116.9Margin 52.5% 44.1%EBIT 456 868.9 607.2Margin 26.8% 18.1% 21.1%


There are two implications from this analysis:

We can infer from this analysis that CCL’s convenience and single-serve sales provide highermargins than take-home, and have enabled CCL to expand margins from mix changes as thesales of the convenience formats have taken market share. However,

Energy is a more profitable and increasingly popular alternative replacement to CSDs that isexpected to continue to take share from incumbent products, putting the most profitablechannels to market at risk for CCL.

We forecast that Energy drinks will represent 14.5% of supermarket beverage sales by 2020, from6.7% in 2010.

Figure 19: Supermarket beverage sales, 2010 Figure 20: Supermarket beverage sales, 2020f

Source: Retail World, CBA Source: CBA estimates

Risks that energy drinks might be banned by health authorities

While energy drinks have received their fair share of negative publicity relating to adverse healthimpacts, any product bans appear unlikely at this stage. FDA incident reports in the US intoseveral deaths that may have occurred following the consumption of energy drinks could notprove that the energy drinks caused the deaths.

100mL of a generic energy drink contains approximately 32 milligrams of caffeine. This comparesto an espresso coffee (60mL) at ~85mg and filter coffee (240mL) at ~150mg.

New Scientist claims that a lethal dose of caffeine is about 5 grams for adults. Therefore, one

would need to drink over 15 litres of energy drink to get to the lethal dose level. Other ingredientssuch as taurine and guarana have not yet been properly studied.

64.3%6.7%

29.0% CSD market - exEnergy

Energy

Still

59.1%

14.5%

26.4%CSD market - exEnergy

Energy

Still


11/18



11

CCL earnings growth at greater risk than sales

CCL dominates the CSD market in Australia. Figures 21 and 22 below demonstrate the split ofsupermarket beverage sales by category and the same split for CCL in Australia.

While the company’s domination of the CSD category demonstrates a strength, it also poses arisk over the long term if Energy continues to take market share. Beyond the pure profit motive forEnergy drink manufacturers and retailers, the longer-term trends also appear to be well supportedby the significant skew of Energy drink consumption amongst younger generations.

Figure 21: 2012 beverage sales, Supermarket channel Figure 22: CCL supermarket sales mix, by category

Source: Company data, CBA estimates Source: Company data, CBA estimates

Earnings impact

CCL remains a resilient business with dominant market share, pricing power, product innovationand a staple product offering. As such, we continue to believe the company will have predictableearnings characteristics over the foreseeable future.

However, the key issue for earnings is that the company’s core CSD offering is struggling tomaintain share and CCL’s ability to respond in the Energy market is limited. The impact toearnings is exacerbated by the group’s sensitivity to the highly profitable single-serve/convenience market.

Mother, CCL’s energy product, is the number three player in the Energy market, but decliningagainst the stronger market share positions of the two distinct leaders (V and Red Bull) andaggressive new market entrants (Monster and Rockstar).

We have reduced our forecast sales and earnings expectations from the Australian division toreflect our view that CCL will underperform the market over the medium term. This translates into

Australian sales growth in the order of 2-4% pa and EBIT growth marginally less than this as mixshift exacerbates the impact.

60.4%5.1%

0.6%

8.5%3.7% 1.6% 0.1%

CSD

Juice

Water

Energy

Sports

Ice tea

other

Energy2%

Fruit Juice1%

Still water6%

Tea1%

SportsDrinks

4%

Soft Drinks86%


12/18



12

Figure 23: Estimated Supermarket EBIT distribution, 2012 Figure 24: Forecast Supermarket EBIT distribution, 2020

Source: CBA estimates Source: CBA estimates

The ability to forecast the impact of the shift to Energy on CCL is difficult; however, the heavyreliance on the high-profit single-serve format will have a disproportionate impact on earnings ifmarket share continues to be lost to Energy.

Valuation and recommendation

The slower growth environment from the core Australian division makes it that much harder forCCL to return to its historical Group EBIT growth rate of 9-10% (three-year EBIT CAGR to FY10)experienced prior to the La Nina weather event of 2011.

Despite improving outlook for weather, we forecast three-year EBIT CAGR of 2.6% for the Australian division and 5.2% for Group EBIT over the period to CY15.

Relative PE

Against this earnings growth outlook, we believe CCL’s current market premium of 12% (ASX200Industrials ex Financials) is unlikely to be sustained in the medium term as the outlook for earningscomes into focus from the market. Over the past five years, CCL has traded at an average PEpremium of 14% to the market. We now believe a 5%-10% premium to market is now warrantedfor CCL. This would imply a fair value for CCL of $12.00-$12.50ps.

DCF/Sum-of-the-parts

Based on a combined DCF and sum-of-the-parts method, we value CCL at $12.50ps, andforecast a 12-month price target of $13.20ps.

Figure 25: CCL Relative PE, 12m forward

Source: CBA estimates

68.4%

26.5%

5.1%

Take home

Single serve

Energy

70.1%

22.6%

7.3%

Take home

Single serve

Energy

0.90

1.00

1.10

1.20

1.30

1.40

1.50

31-Jan-05 31-Jan-07 31-Jan-09 31-Jan-11

+1 std dev

-1 std dev


13/18



13

Relative to global peers

Trading at 10.2x EV/EBITDA, CCL is not expensive against its global peers which trade at 10.4x.However, the majority of CCL’s bottler peers are trading in the 9-10x EBITDA range, suggestingCCL is not cheap either.

Based on the lack of clear value and potential medium-term earnings risks, we are downgradingour recommendation on CCL to Underweight.

Figure 26: Global peer comparison

PE ratio EV /EBITDA

EBIT margin ND / EBITDA

Company Currency Last year-end Price (LC) EV (LCm) FY1 FY2 FY1 FY2 FY1 FY1

THE COCA-COLA COMPANY USD 31-Dec-11 37.03 183,129 18.5 17.0 13.8 12.5 24.8% 1.2CC FEMSA MXN 31-Dec-11 194.41 374,824 29.3 26.1 13.7 12.3 14.7% 0.3COKE ENTERPRISES USD 31-Dec-11 32.95 12,405 14.7 13.2 9.3 8.9 12.4% 2.1CC HELLENIC EUR 31-Dec-11 17.60 8,488 22.0 18.5 9.8 8.6 6.7% 1.9PEPSICO USD 31-Dec-11 70.01 130,881 17.2 15.9 10.6 9.7 14.7% 1.8

MONSTER BEVERAGE USD 29-Feb-12 50.33 8,794 21.4 17.3 12.9 10.8 27.5% -1.3DR PEPPER SNAPPLE GROUP USD 29-Feb-12 45.70 11,610 14.3 13.2 8.5 8.1 18.9% 1.9

Average 19.6 17.3 11.2 10.1 17.1% 1.1Coca-Cola Amatil AUD 31-Dec-11 13.80 12,008 18.5 17.5 10.8 10.2 17.3% 1.6



14/18



14

Current recommendation definitionsCBA Institutional Equities investment recommendations are determined by the covering analyst and reflect the analyst’s assessment of a stock’s expected totalshareholder return (TSR). Stock expected TSR is calculated as the difference between the analyst’s 12-month price target and the current share price plus the forecastdividend yield.Overweight : Stocks with an Overweight recommendation represent the most attractive stocks under the analyst’s coverage. They are generally forecast to generatehigher TSR compared to the rest of the analyst’s coverage.

Neutral : Stocks with a Neutral recommendation are less attractive than stocks with an Overweight recommendation. They are generally forecast to generate lowerTSR compared to stocks with an Overweight recommendation in the analyst’s coverage.Underweight : Stocks with an Underweight recommendation are the least attractive stocks. They are generally forecast to generate lower TSR compared to stockswith a Neutral recommendation in the analyst’s coverage.Note : CBA’s previous recommendations prior to 9 November 2012 were:Buy: Stocks with a Buy recommendation represent the most attractive stocks under the analyst’s coverage. They are forecast to generate significantly positiveexpected total shareholder returns.Hold: Stocks with a Hold recommendation are less attractive than stocks with a Buy recommendation. They are forecast to generate flat to slightly positive expectedtotal shareholder returns.Sell: Stocks with a Sell recommendation are the least attractive stocks. They are forecast to generate flat or negative expected total shareholder returns.CBA’s previous recommendations prior to 25 January 2010 were:Short term (over 6 months): Buy – appreciate by >10%, Accumulate – increase between 2% and 10%, Reduce – increase by less than 2% or fall by up to 5%,Sell – fallby >5%.Long term (24 months) Outperform (O / P) – exceed market return by >5%, Market Perform (M / P) – be in line with market return, +/-5%, Under Perform (U / P) – beless than market return by >5%.

One year history of price target and recommendation changes

Date Price Target ($) Recommendation22/02/2012 13.00 HOLD15/05/2012 13.45 HOLD22/08/2012 13.40 HOLD9/11/2012 13.40 NEUTRAL12/12/2012 13.35 NEUTRAL10/01/2013 13.20 UNDERWEIGHT

Source: CBA Equities, IRESS

11.0

12.0

13.0

14.0

J a n

1 2

F e

b 1 2

M a r

1 2

A p r

1 2

M a y

1 2

J u n

1 2

J u l 1 2

A u g

1 2

S e p

1 2

O c

t 1 2

N o v

1 2

D e c

1 2

CCL Price Target


15/18


16/18



16

report. Any valuations, projections and forecasts contained in this report are based on the number of assumptions and estimatesand are subject to contingencies and uncertainties. The inclusion of any such valuations, projections and forecasts in this reportshould not be regarded as a representation or warranty by or on behalf of the Group or any person or entity within the Group thatsuch valuations, projections and forecasts or their underlying assumptions and estimates will be met or realized. Pastperformance is not a reliable indicator of future performance. Foreign currency rates of exchange may adversely affect the value,price or income of any security or related investment mentioned in this report. In addition, investors in securities, such as ADRs,whose values are influenced by the currency of the underlying security, effectively assume currency risk.

The Group may engage in transactions in a manner inconsistent with this research report. In the case of certain products, theBank or one of its affiliates is or may be the only market maker. No inducement has been or will be received by the Group or anyperson or entity within the Group or the research analyst from the subject of this report or its associates to undertake theresearch or make the recommendation. The research staff responsible for this report receive a salary and a bonus that isdependent on a number of factors including their performance and the overall financial performance of the Group. Decisionsabout remuneration for research staff are not contingent on specific investment banking, corporate advisory or dealingtransactions. Investment Banking does not set or determine the remuneration pool or levels for research staff. The Groupprovides, or seeks to provide, services to the subject of the report and its associates. This report is not directed to, or intendedfor distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other

jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subjectany entity within the Group to any registration or licensing requirement within such jurisdiction. All material presented in thisreport, unless specifically indicated otherwise, is under copyright to entities within the Group. None of the material, nor itscontent, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the priorwritten permission of the Group or the appropriate entity within the Group.


17/18



17

Please view our website at www.research.commbank.com.au. The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank") and itssubsidiaries, including Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec"), Commonwealth Australia Securities LLC, CBA Europe Ltdand Global Markets Research, are domestic or foreign entities or business areas of the Commonwealth Bank Group of Companies (CBGOC). CBGOC and theirdirectors, employees and representatives are referred to in this Appendix as “the Group”. This report is published solely for informational purposes and is not to beconstrued as a solicitation or an offer to buy any securities or financial instruments. This report has been prepared without taking account of the objectives, financialsituation and capacity to bear loss, knowledge, experience or needs of any specific person who may receive this report. No member of the Group does, or is requiredto, assess the appropriateness or suitability of the report for recipients who therefore do not benefit from any regulatory protections in this regard. All recipients

should, before acting on the information in this report, consider the appropriateness and suitability of the information, having regard to their own objectives, financialsituation and needs, and, if necessary seek the appropriate professional, foreign exchange or financial advice regarding the content of this report. We believe that theinformation in this report is correct and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time ofits compilation, but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement madein this report. Any opinions, conclusions or recommendations set forth in this report are subject to change without notice and may differ or be contrary to the opinions,conclusions or recommendations expressed elsewhere by the Group. We are under no obligation to, and do not, update or keep current the information contained inthis report. The Group does not accept any liability for any loss or damage arising out of the use of all or any part of this report. Any valuations, projections andforecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. Different assumptions andestimates could result in materially different results. The Group does not represent or warrant that any of these valuations, projections or forecasts, or any of theunderlying assumptions or estimates, will be met. Past performance is not a reliable indicator of future performance. The Group has provided, provides, or seeks toprovide, investment banking, capital markets and/or other services, including financial services, to the companies described in the report and their associates. Thisreport is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other

jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject any entity within the Group to anyregistration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to theGroup. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the priorwritten permission of the appropriate entity within the Group. In the case of certain products, the Bank or one of its related bodies corporate is or may be the onlymarket maker. The Group, its agents, associates and clients have or have had long or short positions in the securities or other financial instruments referred to herein,and may at any time make purchases and/or sales in such interests or securities as principal or agent, including selling to or buying from clients on a principal basisand may engage in transactions in a manner inconsistent with this report.

European Investors: This report is published, approved and distributed in the UK by the Bank and by CBA Europe Ltd (“CBAE”). The Bank and CBAE are bothregistered in England (No. BR250 and 05687023 respectively) and authorised and regulated in the UK by the Financial Services Authority (“FSA”). This report does notpurport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for retail customers and are notavailable to them. The products and services referred to in this report may put your capital at risk. Investments, persons, matters and services referred to in this reportmay not be regulated by the FSA. CBAE can clarify where FSA regulations apply.

Singapore Investors: This report is distributed in Singapore by Commonwealth Bank of Australia, Singapore Branch (company number F03137W) and is madeavailable only for persons who are Accredited Investors as defined in the Singapore Securities and Futures Act and the Financial Advisers Act. It has not beenprepared for, and must not be distributed to or replicated in any form, to anyone who is not an Accredited Investor.

Hong Kong Investors: This report was prepared, approved and published by the Bank, and distributed in Hong Kong by the Bank's Hong Kong Branch. The HongKong Branch is a registered institution with the Hong Kong Monetary Authority to carry out the Type 1 (Dealing in securities) and Type 4 (Advising on securities)regulated activities under the Securities and Futures Ordinance. Investors should understand the risks in investments and that prices do go up as well as down, and insome cases may even become worthless. Research report on collective investment schemes which have not been authorized by the Securities and FuturesCommission is not directed to, or intended for distribution in Hong Kong.

All investors: Analyst Certification and Disclaimer: Each research analyst, primarily responsible for the content of this research report, in whole or in part, certifies thatwith respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about thosesecurities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed bythat research analyst in the report. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and otherconstituencies for the purpose of gathering, synthesizing, and interpreting market information. Directors or employees of the Group may serve or may have served asofficers or directors of the subject company of this report. The compensation of analysts who prepared this report is determined exclusively by research managementand senior management (not including investment banking).

Unless agreed separately, we do not charge any fees for any information provided in this presentation. You may be charged fees in relation to the financial products orother services the Bank provides, these are set out in the relevant Financial Services Guide (FSG) and relevant Product Disclosure Statements (PDS). Our employeesreceive a salary and do not receive any commissions or fees. However, they may be eligible for a bonus payment from us based on a number of factors relating totheir overall performance during the year. These factors include the level of revenue they generate, meeting client service standards and reaching individual salesportfolio targets. Our employees may also receive benefits such as tickets to sporting and cultural events, corporate promotional merchandise and other similarbenefits. If you have a complaint, the Bank’s dispute resolution process can be accessed on 132221.

Unless otherwise noted, all data is sourced from Australian Bureau of Statistics material (www.abs.gov.au).


18/18


Equities: CBA Institutional Equities Contacts

Equities Research

Head of Research Management Sarah McWilliams +612 9118 1449

Consumer AgribusinessJordan Rogers +612 9118 1177Food & Beverage

Andrew McLennan +612 9118 1199Sam Teeger +612 9118 1184GamingBen Brownette +612 9118 1190

Vana Makaric +612 9118 1198Media

Alice Bennett +613 9675 7118Nathan Burley +613 9675 7029Retail – Discretionary & Staples

Andrew McLennan +612 9118 1199Sam Teeger +612 9118 1184

EnergyLuke Smith +612 9118 2868Lachlan Cuskelly +612 9118 1981

FinancialsBanks Ben Zucker +612 9118 1185Ross Curran +612 9118 1181Jeff Cai +612 9118 1186Diversified Financials Ross Curran +612 9118 1181Naveen Patney +612 9118 6391Insurance Ross Curran +612 9118 1181Naveen Patney +612 9118 6391Property David Lloyd +612 9118 1192James Druce +612 9118 1193

HealthcareBruce Du +613 9675 6244

Industrials and UtilitiesDevelopers & ContractorsBen Brownette +612 9118 1190

Vana Makaric +612 9118 1198Transport/Infrastructure Matt Crowe +612 9118 1189

Andre Fromyhr +612 9118 1188Utilities Will Allott +612 9916 0946Matt Crowe +612 9118 1189

For email: first [email protected]* Except: Michael Ward – [email protected]

Michael Robson - [email protected] Tuffley – [email protected] Turner – [email protected] Leung – [email protected]

Equities Research (cont)

MaterialsChemicals Michael Ward* +612 9118 1139Rahul Badethalav +612 9117 1243

Construction Materials Michael Ward* +612 9118 1139Rahul Badethalav +612 9117 1243Paper & Packaging Michael Ward* +612 9118 1139Rahul Badethalav +612 9117 1243Commodities Lachlan Shaw +613 9675 8618

Vivek Dhar +613 9675 6183Diversified Resources/Steel

Andrew Hines +613 9675 7443Tomas Vasquez +613 9675 6059Metals & Mining/Gold

Andrew Knuckey +613 9675 6791Paul Hodsman +613 9675 8532

Telecommunications Alice Bennett +613 9675 7118Nathan Burley +613 9675 7029

Emerging CompaniesNick Maclean +613 9675 7972Jordan Rogers +612 9118 1177Naveen Patney +612 9118 6391

EconomicsMichael Blythe +612 9118 1101

Quantitative Research & DatabaseNizar Torlakovic +612 9118 1178Sidney Chow +612 9118 1200

Supervisory AnalystJoe Pardea +612 9118 6388

Publishing +612 9118 1183Fax (Sydney) +612 9118 1000Fax (Melbourne) +613 9675 7622

CommSec Retail Craig James +612 9118 1806Savanth Sebastian +612 9118 1805

Institutional Equities

Head of Institutional Equities Jay MacGregor +612 9118 1204

Equity Distribution Equity Research Sales Rodney Walker (Head of Sales) +612 9117 7888

Angus Esslemont +612 9118 1471Christine Leonard +612 9118 1442Chad Mikhael (Emerging Companies) +612 9118 1210James Barratt (Specialist Sales) +612 9118 4446Rod Hardwick +612 9118 1444Sarah Beeby +612 9118 1018Boyd Carter (Melbourne) +613 9675 6815Melissa George (Desk Manager) +612 9118 1446Corporate Access Marisa Zammit +612 9303 1120

Amanda Chamberlin +612 9118 1443Mags Ni Mhaonaigh +612 9118 1448Client Execution Services Andrew Tyrrell +612 9118 1451Paul Welsh +612 9118 1450Rod Ellis +612 9118 1452

Alex Stanford +612 9118 1456Matt Bromfield +612 9118 1455Steven Sassine +612 9117 0108

Anthony Brownlow (Electronic Trading) +612 9118 1463Nicolas Thompson (Melbourne) +613 9675 6618

Visakha Mayo +612 9117 7035Michael Robson* +64 9301 5686

Asian Sales Toll Free (HK) +800 901 636Toll Free (Sing) +800 616 1949

Fax (Melbourne) +613 9675 7622

Global Markets Research CommoditiesLuke Mathews +612 9118 1098Lachlan Shaw +613 9675 8618Foreign Exchange Richard Grace +612 9117 0080Joseph Capurso +612 9118 1106Peter Dragicevich +612 9118 1107

Andy Ji +65 6349 7056Chris Tennent-Brown +612 9117 1378Martin McMahon +44 20 7710 3918Fixed Income Adam Donaldson +612 9118 1095Philip Brown +612 9118 1090Steve Shoobert +612 9118 1096Tariq Chotani +612 9280 8058Tally Dewan +612 9118 1105Kevin Ward +612 9118 1960

Alex Stanley +612 9118 1125Economics

Michael Blythe +612 9118 1101Michael Workman +612 9118 1019John Peters +612 9117 0112Gareth Aird +612 9118 1100Diana Mousina +612 9118 6394Nick Tuffley* +64 9374 8604Jane Turner* +64 9374 8185Christina Leung* +64 9369 4421

Fax (Sydney) +612 9118 1010

Coca ColaAmatilLimited 10 Jan 2013 2230 1

Documents

Transcript of Coca ColaAmatilLimited 10 Jan 2013 2230 1