Only quoting single digit growth primes the expectations of the market at a certain level and gives the management an easier return to beat when they make an announcement. This is why its a good move. Had they come out and said they expect double digit growth and they miss...this puts pressure on the price.
As for bad news in the 2nd half, I would hope that they have the common sense to clear as much bad news as possible in the announcement just gone. If you are a new CEO this is management 101. You get to announce a tonne of bad news, bringing forward bad news if need be, to get everything out in the open, blaming legacy issues and giving you a nice low base to work off.
As for holding out on good news, one major reason they may have done this is that you don't want to take away from one piece of clearly good news (TCCC investment of $500m) by talking about too many other good pieces of news. Best save it for a trading update in early December.
In terms of valuation, another way to think about this is by breaking the company into 2 parts. The Indonesian business and the Aust/NZ business. The $500m TCCC investment in the Indonesian business for 30% ownership values that part of the business at $1.66bn. If we subtract this off the CCL market cap we are left with approx $5bn for the Aust/NZ business.
Looking at their H1 2014 net profit of $182m (remember this is 15% lower than the prior corresponding period) we see that the Indonesian business only contributed $5m to the profit. Let's subtract this and we are left with a H1 2014 net profit of $177m for Aust/NZ business. Now let's assume CCL have another disaster and H2 2014 net profit drops by another 10% down to $159m. This will take full year net profit for the Aust/NZ business to $336m. Based on the current price, this gives us a PE of 15 for the Australian business.
Obviously the Indonesian business being valued at $1.66bn given the very small profit it is currently showing, seems extraordinarily high but given that TCCC have committed to invest and presumably help in growing that business out, I have far more confidence they see value that we can't. Importantly, the Indonesia part of the business represents 25% of the overall market cap of CCL.
The more established Aust/NZ business which represents 75% of CCL, whilst not cheap, with a PE of approx 15 it is certainly not expensive and if they are able to stabilise revenue and attain single digit growth whilst reducing costs and improving efficiency then this is close to fairly priced.
So you have 75% of the business valued fairly and 25% valued for extreme growth. The real key to this business becomes Indonesia.
I agree with your statement re the length of the presentation. My only input would be that this is inherently a simple business. They just spent 3 months undertaking a comprehensive, fully resourced review. The results of the review were very simple, like you suggested, but what do you expect from a company selling soft drink? There is only so many levers you can pull as management and a long presentation gives the impression of thoroughness, commitment to 'change' from how they were doing things etc.
CCL Price at posting:
$9.29 Sentiment: Buy Disclosure: Held
