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Sunday, July 31, 2011

Coca Cola Amatil (CCLAY)

I looked at them back in March 2006.  It's a good summary of Amatil's long history (essentially back to 1904).  They manufacture, market, and distribute Coca Cola products and local brands in Australia and other nearby markets.

They started moving into bulk water, commercial refrigerators, Crusta Fruit Juices, Grinders Coffee, packaged fruits, veggies, etc.  I think I like that shotgun approach.

The company was earning around 30 cents.  Operating margins were around 14%.  Weak cash flow.

Note that this is an ADR which back then consisted of 2 shares of Amatil stock for each share of CCLAY.  That's what OTC Markets is saying about the ADR now.

The stock (ADR) was selling for $10.30 and I figured it was worth at least $6, but maybe up to $16.

And of course, the annual report had photos of hot Australian women.

Based on experience, that photo will generate about 4 visits a day for the next 5 years.

Today the stock/ADR is at US$24.81.

Yahoo, corporate website, OTC markets

Looking at the "factbook" that the company puts out:
Earnings, ROI, and dividends have improved consistently since I last looked at CCLAY.

Production is in Indonesia (485K customers), Australia (116K customers), Papua New Guinea (8.6K customers), Fiji (3.5Kcustomers), NZ (17K customers).

In AU, they have 56% market share for carbonated drinks (most of the business).  25% bottled water.  45% sports drinks.

In NZ, they have 73% carbonated drink market share and reasonable share in the other areas.

WOW!  In Indonesia they have 90% market share for carbonated drinks, which is around 2/3 of what they sell there.

Looking at the annual report for 2010 (ending Dec):

Their "Pacific Beverage" JV now has 5 of the top 20 beers in AU.

Cost of goods sold went up 3.3%, but they recovered all of it.  In Indonesia, local currency COGS went up 15%.

Lots of disclosure in plain language.  Very, very detailed incentive plan that seems quite good.

They encourage and track executive ownership of the stock.

Earnings growth has been steady (too steady?) from 2001 to 2010.

15% operating margin.  11% net margin.

AU$66 cents per share (AU$1.32 or US$1.20 per ADR) in earnings for 2010.  Not much else in comprehensive income.

Current assets are mostly AR and inventories plus some cash.
Noncurrent assets are PP&E, investments in bottlers' agreements, and intangibles.
Current liabilities are AP, accrued charges, and some debt.
Noncurrent liabilities are debt. Debt to equity is fairly close to 1.

Note that they're sitting on accumulated losses.

Cash flow from operations is a bit above earnings, but capex is very large. Not sure if this is expansion or not.  2010 and 2009 saw weak operating cash flow [minus capex].  This explains their growth rate.

They borrowed a bunch of money in 2009, paid a bunch back in 2010.

Equity statement looks ok. [Is that a flare up of Meneire's disease coming on?]

Intangibles are customer lists (depreciate in 5 years) and brand names (depreciate in 40-50 years).

Most of the revenues come from Australia Beverages.  None of the smaller ones are growing fast.

Coca Cola owns a bit under 30% of the stock.


The top line hasn't really grown since 2006.  For comparison, when you look at the container leasing companies, you see a powerful tilt upwards over time that's only very temporarily overcome by the economic downturn.  When you look at this company, it's basically flat.  They've pulled earnings up, but that's not sustainable without revenue growth: either stealing market share (difficult to maintain) or having a growing total (reasonably) available market.

The ADR needs to drop well below $15 before I'd even look at it.  It's probably worth $18.  Am I missing something with the revenue growth?


Coca Cola Amatil is a leading company done here in Australia. While it's ADRs are listed in the Pink Sheets, it actually forms part of our S&P/ASX 50 index.

Since it's such a big company down here, it's followed by dozens of analysts (both sell-side and buy-side). With that kind of scrutiny, it's likely to be adaquately priced.

While I enjoy reading your thoughts, it might be more productive to spend your time on smaller companies.

Of course, if you can figure a way to do an arbitrage between the ADRs listed on your OTC and the shares listed on our main board (and eliminate the currency risk while you're at it), then that might be profitable.

Yeah, I'm not surprised it's an All Ordinaries component. I'm looking at a lot of companies that are fairly large and well-covered, such as Berkshire Hathaway, the container leasing companies, and others.

My focus right now on larger companies is based on my view that since volatility has returned, it's not necessary to look at tiny companies. There are some small companies that I'm following, but I haven't posted about them because I'd like to avoid coverage since they aren't cheap enough right now. But my focus right now is on larger companies.

I was down in Melbourne a few years ago. Great place!
OK. I don't follow CCL myself, but here's a quick summary of what the press have been saying lately about CCL's market position.

1. Coca Cola (the beverage) has pretty much reached saturation levels. They dominate the cola market so much, that there appears to be little further prospect of taking any more market share away from Pepsi and other cola producers.

2. To try to find new sources of sales growth, CCL has being buying up other businesses eg mineral water, fruit juice drinks, etc. The general sentiment in the press is that this hasn't moved the needle much lately, in terms of sales growth.

3. CCL have got themselves caught up in a war between our two biggest supermaket chains. Basically, each of the supermarket chains are trying to put pressure on CCL's margins, but CCL is resisting that given the enormous levels of branch loyalty Coca Cola has among consumers. However, the two supermaket chains are retaliating by giving a lot more shelf space to other makers of carbonated beverages. There is speculation that this might hit CCL's market share, but they appear to be holding the line for now.

4. More generally, CCL also sells some market leading tobacco products (ie, the "Amatil" part of the business). The prospects for that part of the business don't look hot at present, due to regulatory intervention. We have now got to the point that all cigarette advertising is prohibited; cigarettes cannot even be displayed in stores. Also our Federal government is now trying to introduce a new law which will force all cigarette makers to use uniform packaging, which is plastered with health warnings.

That's pretty what the press have been saying for the last few months as to sales growth prospects.

If you are looking for valuation comparables, you might try the purchase of the Schweppes Australian soft drink business by a Japanese buyer a few years ago. Warning: Japanese companies tend to pay very fancy multiples for established businesses in Australia.

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