Coca-Cola Amatil's Near-Term Outlook Goes Flat, but We See Long-Run Improvement; Shares Undervalued

Leading Independent Investment Research, Morningstar, Inc.

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Equity Bottom-Up

Coca-Cola Amatil has faced two pieces of bad news recently, with grocer <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a> announcing it would not immediately stock the newly launched Coke No Sugar, and <a href="https://www.smartkarma.com/entities/700" target="_blank" data-smartkarma-citation="entities:700:1">Domino's Pizza Enterprises Ltd. (DMP AU)</a> switching to sell Pepsi instead of Coca-Cola in Australia. But we don’t believe either development dramatically alters our long-term view, and we reiterate our AUD 9.40 fair value estimate and narrow moat rating for the firm.We believe these news items offer more headline impact than actual economic damage, given Woolworths is the only major retailer that has opted to not stock No Sugar, and Dominos sells less than a million total cases of beverages annually, by our estimates, versus Coke’s total volume of nearly 320 million cases sold in Australia in fiscal 2016. That said, we think these incidents highlight our view Amatil is facing diminishing brand intangible assets in its core Australian business, particularly within carbonated soft drinks, or CSDs. We continue to expect consumer health concerns to drive a shift away from CSDs, and when combined with the more-limited brand strength, we forecast a 3% annual volume decline and sub-inflation pricing in the company’s carbonated offerings.But we estimate there could be up to 10% downside risk to our valuation, to AUD 8.40, should the company face greater retailer or pricing pressure than we currently anticipate. Woolworths' decision could be an early indication Amatil may face shelf-space constraints when bringing new non-carbonated products to market, which would hamper a key part of our long-term thesis. Similarly, Amatil could face further pricing pressure from its remaining food-service partners, driving pricing downward instead of our assumption for a slight positive. Should both these negatives eventuate, we foresee a low-single-digit annual revenue decline in Australia compared with our base-case forecast for flat top-line performance, and lower profitability due to fixed-cost deleveraging.Analyst: Adam Fleck, CFA

Coca-Cola Amatil has faced two pieces of bad news recently, with grocer Woolworths Ltd (WOW AU) announcing it would not immediately stock the newly launched Coke No Sugar, and Domino's Pizza Enterprises Ltd. (DMP AU) switching to sell Pepsi instead of Coca-Cola in Australia. But we don’t believe either development dramatically alters our long-term view, and we reiterate our AUD 9.40 fair value estimate and narrow moat rating for the firm.We believe these news items offer more headline impact than actual economic damage, given Woolworths is the only major retailer that has opted to not stock No Sugar, and Dominos sells less than a million total cases of beverages annually, by our estimates, versus Coke’s total volume of nearly 320 million cases sold in Australia in fiscal 2016. That said, we think these incidents highlight our view Amatil is facing diminishing brand intangible assets in its core Australian business, particularly within carbonated soft drinks, or CSDs. We continue to expect consumer health concerns to drive a shift away from CSDs, and when combined with the more-limited brand strength, we forecast a 3% annual volume decline and sub-inflation pricing in the company’s carbonated offerings.But we estimate there could be up to 10% downside risk to our valuation, to AUD 8.40, should the company face greater retailer or pricing pressure than we currently anticipate. Woolworths' decision could be an early indication Amatil may face shelf-space constraints when bringing new non-carbonated products to market, which would hamper a key part of our long-term thesis. Similarly, Amatil could face further pricing pressure from its remaining food-service partners, driving pricing downward instead of our assumption for a slight positive. Should both these negatives eventuate, we foresee a low-single-digit annual revenue decline in Australia compared with our base-case forecast for flat top-line performance, and lower profitability due to fixed-cost deleveraging.Analyst: Adam Fleck, CFA

Bad News for Coca-Cola Amatil Creates Downside Risk, but We Don't Yet See a Domino's Effect

Coca Cola Amatil

Bad News for Coca-Cola Amatil Creates Downside Risk, but We Don't Yet See a Domino's Effect