So I’ve been here three weeks. Am I allowed to have a rant yet?
Coca-Cola Amatil (ASX:CCL) has been winding me up for years. Back at its October 2014 strategy day, the company’s new CEO announced an earnings per share (EPS) growth target of mid-single-digit (I assume this means between 3% and 7%).
My eyes rolled. With EPS having decreased 33% in 2 years, this target seemed rather underwhelming. Yet the analyst community loved it. Why? In the foggy world of forecasting earnings, management had provided a guiding light.
Following the guidance was a flashy 90-page slide presentation full of colourful pictures of 200-litre Coke cans, bottles of the new Coke Life product with stevia and hip teenagers drinking these products. These were heralded as the keys to strengthening Amatil’s category leadership position – whatever that means.
So it was with a touch of surprise that management maintained its target for a return to mid-single-digit growth in EPS over the next few years at its AGM last week. Hang on – aren’t we now halfway there? Shouldn’t the language have been around how Amatil is tracking against this goal, rather than it remaining just a target?
To be fair, 2015 saw EPS grow by 4.7%. But this masks a few kickers. Firstly, in late 2014, Amatil sold 29% of its Indonesian business to the Coca-Cola Company for $500 million US. This resulted in its interest bill for 2015 being $36 million lower. Without this, EPS would have declined.
Secondly, 2014 was one of those years when things couldn’t get much worse for two of its most cyclical businesses, Indonesia and tinned-fruit business SPC. Both businesses recovered in 2015, although we couldn’t determine the full impact of this because Amatil combines Indonesia together with PNG, while SPC’s earnings are buried in the Corporate, Food and Services division.
The 2015 result masked some serious issues that are not being addressed. In addition to its strong brands, Amatil’s major competitive advantage is its distribution. When an Amatil truck delivers products from point A to point B, it passes many customers and its trucks are close to full. From any additional customers they gain or for customers who increase their order size, sales fall straight to the bottom line – there is no extra cost. Smaller competitors don’t have as many customers, so for the same costs (such as fuel, the driver, wear and tear) they derive less sales. Yet when Amatil loses customers or volumes fall, the opposite occurs and sales decline with no offsetting reduction in cost.
This has been occurring in recent years and the current management team has failed to address how to reinvigorate its distribution asset. In fact, they don’t even mention it. There has been little discussion of how to regain shelf space from its powerful supermarket customers, who have been happily allowing competitors onto the shelves. Nor has there been much acknowledgement of its smaller customers, who have been by avoiding Amatil’s distribution in favour of independent wholesalers, or even waiting until supermarkets sell Coke on promotion before filling up their trolleys.
So what will the future bring? According to management, mid-single-digit EPS growth in the next few years. Last week’s AGM contained a ‘disclaimer’ that the first part of 2016 had seen a subdued Australian consumer and currency movements had hurt the Indonesian business. While we sort of got mid-single-digit EPS growth last year, perhaps we shouldn’t necessarily expect mid-single-digit EPS growth this year. And who knows about next year. Or the year after that. But over the next few years – certainly, according to management.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.