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Coca-Cola Amatil Hit By Coronavirus

Jun. 02, 2020 2:35 PM ETCoca-Cola Amatil Limited (CCLAF)
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  • COVID-19 weighs significantly on volumes and margins.
  • Cost savings measures will provide some buffer but there is a risk for dividend cut in 2020.
  • CCL’s exposure to South East Asia provides additional uncertainties for company’s earnings outlook.

On 26th of May 2020, Coca-Cola Amatil (CCL:ASX) held its AGM and provided a trading update for COVID-19 restrictions. The company guided that the COVID resulted in significant weakness in volumes and revenue in April and the first 3 weeks of May with volumes down in all markets with the On-The-Go channel, higher gross margins, more negatively impacted, although grocery was also impacted by lower store visitation and skew to in-home consumption.

Australian Beverages has a mix of volumes across two main channels, On-The Go and Grocery and Petroleum & Convenience, ~40% and ~60%, respectively. The weakness in On-The-Go is a significant negative for CCL given the higher gross margins of that channel.

Previously announced cost savings of A$140m were amplified with ~A$60m to continue from FY21 onwards. While CCL is leveraged to a recovery in Australia and New Zealand post a COVID-19, the COVID-19 economic risk in Fiji, Indonesia and PNG remains which could stifle upside.

During its AGM, CCL noted the following regarding the 4Q20.

“The fourth quarter trading conditions will be imperative to our FY2020

financial performance”

With FY20 earnings guidance continuing to remain withdrawn:

“We are preparing business plans to capture opportunities in the critical fourth quarter trading period, and we are considering the overall direction we take to pursue the best long-term opportunities in the changing environment.”

There may be some potential for improvement in 4Q20, especially as restrictions on activity continue to unwind after what has been a difficult year. Yet I believe 4Q20 commences as existing fiscal stimulus unwinds which could add risk to the consumer in Australia.

Volume Trend

Across the Group, CCL volumes declined 33% in April and 26% in the first 3 weeks of May compare to the same period last year, with 1Q20 volume and revenue growth of low single digits.

This article was written by

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I am a value investor. Interested in mis-priced securities that presents a high upside potential with down-side protection in balance sheet. I am a trained research analyst and continue to practice in industry.

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