all aboard!!!!, page-77

• “Pour a Coke Down Under”
article in the Wall Street Journal today

Australia beverage giant Coca-Cola Amatil has hit a sticky
patch, but business at home and in Indonesia will recharge shares.

• Coke’s Australia business has lost its fizz, but it won’t stay flat forever.

Sydney-listed Coca-Cola Amatil, 29%-owned by the Atlanta-based beverage giant, had a reputation for steady earnings growth through good times and bad. That hasn’t been true lately. The company warned annual earnings before interest tax and one-off items will fall for the first time in more than a decade. Shares have tumbled nearly 20% from their March high.

The 9 billion Australian dollar (US$8.5 billion) market capitalization company had been almost unrivaled in the past several years and had an easy time lifting prices. That formula has stopped working. Old rival Pepsi, via its down under distributor Schweppes Australia, which is owned by Japan’s Asahi, aggressively slashed prices since launching low-sugar Pepsi Next in Australia in September last year, leaving little wriggle room for Coca-Cola Amatil.

There are signs this Coke spill will clean up quickly. Price wars can’t last forever, and indefinite discounting risks hurting Pepsi as much as its competitor. Coke’s sales at drink coolers in the front of stores, where margins are higher, continue to rise and represent a still untapped boost. It also plans to expand its alcohol business by re-entering the beer and cider market next month.

Another positive could come from capex programs winding down, giving the company spare cash to return to shareholders. Coca-Cola Amatil could increase its target dividend payout ratio to 80%-90% from 70%-80%, according to J.P. Morgan analyst Stuart Jackson.

Long term, the challenge of wringing revenue growth out of the mature Australian market will become less important. Coca-Cola Amatil is the sole Coke distributor in Indonesia, which has the world’s fourth largest population at 240 million, 10 times the size of Australia.

While the Indonesia division accounted for around 11% of Coca-Cola Amatil’s profit last year, it’s growing rapidly. It delivered average EBIT growth, before one-off items, of 19% over the past three years, and the company is plowing half its capital expenditures there.

Indonesia won’t be the immediate solution to Coca-Cola Amatil’s problems. That doesn’t mean there won’t be some pop back in the stock.