Coca-Cola Amatil shares dive 6pc as Morgan Stanley’s view sours

ELI GREENBLAT
July 7, 2017
The Australian

The fizz looks to have gone from Coca-Cola Amatil’s shares, as nervous investors flee the stock, ripping more than $1.6 billion in value from its market capitalisation. It also appears Coke may no be longer a popular choice for millennials.

Shares in bottler Coca-Cola Amatil (CCL) slumped more than 6 per cent this morning to a fresh 12-month low after a steady stream of bad news punctured investor confidence in the beverage company, with Morgan Stanley also cutting the stock to a sell.

A profit downgrade in April, the flop of its new brand Coke Life, the loss of a contract with pizza chain Domino’s which has switched to arch rival Pepsi and a refusal by the nation’s biggest retailer, Woolworths, to sell its new Coke “No Sugar” drink has seen $1.6bn in value stripped from Coca-Cola Amatil in just four months.

It comes as chief executive Alison Watkins is working to turnaround the company’s recent poor performance that she inherited when she took on the role in 2014 and in the midst of a general consumer trend away from carbonated soft drinks which generates the overwhelming majority of Coca-Cola Amatil’s earnings thanks to its flagship Coca Cola brand.

This morning, in a bearish report to its clients, Morgan Stanley analyst Thomas Kierath says that while the loss of the contract with Domino’s, Australia’s largest pizza chain, might only represent a small part of its total drinks sales (around 0.9 per cent of Coca-Cola Amatil’s Australian revenue) it could start a rush of operators turning to the cheaper Pepsi brand.

“The Domino’s contract loss marks an important turning point for Coca-Cola Amatil. We think that it provides validation for the Pepsi Schweppes portfolio which likely leads to either margin compression via lower pricing or share loss,’’ Mr Kierath said.

Morgan Stanley has reduced its rating to “underweight” and put a price target of $8 on the stock.

Coca-Cola Amatil shares fell more than 6 per cent in early trade to a low of $8.33 and at 11.57am (AEST) were down 48 cents, or 5.39 per cent, to $8.43.

“By itself, the contact loss is manageable but given Domino’s very strong brand, we think that it may provide validation to the Pepsi-Schweppes portfolio such that smaller operators are also inclined to make the switch,’’ the analyst said.

“At a minimum we believe that QSR (Quick Service Restaurants) players bargaining position with Coca-Cola Amatil will have improved so should be able to extract better pricing arrangements impacting Coca-Cola Amatil’s margins.”

As fast food restaurants look to soften the impact of rising costs, such as rent, electricity and labour, they are looking for savings and one option is now to dump the more expensive Coke in favour of cheaper brands such as Pepsi.

“Coca-Cola Amatil’s flagship brand Coke no longer has the pulling power that it once commanded, especially with younger people, a demographic where Domino’s over-indexes.”

Morgan Stanley now believes there is a high probability that Coca-Cola Amatil will miss its already downgraded 2017 earnings guidance of a flat profit against 2016.