Morningstar | Coke Amatil’s SPC Sale Price Lower than Expected, but Doesn’t Move the Needle
Coca-Cola Amatil’s sale price for its SPC food business trails our prior expectations but the deal is too small to impact our valuation. We maintain our AUD 8.90 per share fair value estimate for the narrow-moat firm, which is now more focused and profitable.Amatil agreed to sell SPC to Shepparton Partners Collective, a joint venture between Perma Funds Management and private investment firm The Eights for AUD 40 million. Amatil is also eligible for up to AUD 15 million in deferred payment after four years, depending on business performance at SPC, meaning proceeds could total up to AUD 55 million. There will be no tax due on the initial AUD 40 million, but the use of prior losses to offset future tax will reduce dividend franking in fiscal 2019. The sum trails our previously assumed proceeds of AUD 100 million, but the difference totals less than 1% in our valuation. Moreover, we remain encouraged that selling the business will remove a loss-making endeavour from Amatil’s income statement, while also freeing a substantial portion of working capital.
Recent management commentary at its AGM aligns with our outlook, but Amatil’s shares now fully value the growth opportunities we see, trading slightly above our fair value estimate. The company’s investment in additional sales people in Australia has led to a decent demand pick up. For instance, metro areas in New South Wales, where sales visitation frequency has climbed, has resulted in a 2% improvement in volume compared with an 11% decline prior to the initiative’s start in fiscal 2018, per management. Nonetheless, we incorporate this momentum into our outlook, with the Australian segment’s revenue returning to positive low-single-digit growth in 2020 after many years of annual declines. Offsetting our optimism, we caution that the continued investment to drive these gains will likely keep a lid on future profitability; we forecast Australian EBIT margins remaining flat at about 14.5% over the next five years.
Coca-Cola Amatil manufactures, distributes and sells ready-to-drink beverages. Co.'s product range includes non-alcohol sparkling, beverages, spring water, sports and energy drinks, fruit juices, iced tea, flavoured milk, coffee, tea, beer, cider, spirits and packaged ready-to-eat fruit and vegetable snacks and products. Co.'s segments include: Non-Alcohol Beverages, which manufactures, distributes and markets sparkling drinks and other non-alcohol beverages; Alcohol & Coffee Beverages, which manufactures and distributes premium spirits, beer and coffee products; and Corporate, Food & Services, which is involved in the processing and marketing of fruit and other food products business.
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