Coca-Cola Amatil (CCL) Update

Coca-Cola Amatil (CCL) has a reduced target price from Citi analysts but have a Buy recommendation.

Coca-Cola Amatil (CCL): Volume Concerns Overplayed

Soft Drinks Are Defensive — Market concerns over recent soft volume performance have been overplayed. The volume drop is primarily driven by short-term factors. The soft drink category is defensive and as a result we expect volumes to hold up through the ensuing consumer downturn. Coca- Cola Amatil remains a double-digit growth story.

Slow Start To FY08E — Anecdotal evidence suggests Q108 has been a slow period for the Australian soft drinks market. Soft volumes are a result of adverse weather, retailer de-stocking and reduced supermarket promotional activity.

Earnings Revisions — We reduce our earnings estimates by 4% in FY08E and 3% in FY09E. Our revisions reflect: (1) lower full-year volume expectations for the Australian business given the slow start to the year, and (2) lower Indonesian contribution given the impact of food inflation and rising fuel costs.

AGM Update on 15 May — CCL will release a trading update on 15 May. We expect the company to reassure the market that key earnings drivers remain in place – namely gross margin expansion and trans-Tasman cost savings. Moreover, with COGS still in “manageable” territory for FY09E, further gross margin driven growth will accrue in the medium term.

Buy — CCL’s valuation looks compelling, offering both strong EPS growth and defensive characteristics. Trading on a FY09E P/E multiple of 13.1x, CCL is now at a 15% discount to international peers. We reduce our target price from A$11 to A$10.70 to reflect our earnings adjustments.