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Fitch Affirms Coca-Cola Amatil at 'BBB+'; Outlook Stable
April 7, 2017 / 6:55 AM / 6 months ago

Fitch Affirms Coca-Cola Amatil at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) SYDNEY, April 07 (Fitch) Fitch Ratings-Sydney-06 April 2017: Fitch Ratings has affirmed Australia-based Coca-Cola Amatil Limited's (CCL) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+' and its Short-Term IDR at 'F2'. The Outlook is Stable. Fitch expects CCL's credit metrics to stabilise following its AUD350 million share buy-back. The Australian beverage business is likely to be a drag on group performance due to structural market challenges and slow progress on portfolio rebalancing. However, we believe increasing contributions of CCL's international businesses, alongside improving results in the alcohol and coffee business, will offset the slowdown in the Australian beverage business and support earnings growth at the group level. CCL's ratings continue to benefit from a one-notch uplift from its standalone rating, reflecting CCL's close strategic ties with its parent, The Coca-Cola Company (Coca-Cola, A+/Negative). KEY RATING DRIVERS Major Coca-Cola Bottler: CCL is a major bottler in the Coca-Cola System and provides access to more than 285 million customers in the Asia-Pacific region. CCL has a market share of around 65% in Australia's highly concentrated AUD4 billion non-alcoholic beverage market. Japan's Asahi Group, with brands such as Pepsi and Schweppes, is CCL's largest competitor, with an Australian market share of around 15%. The rest of the market is mainly private-label supermarket chain goods. Structural Shift Towards Healthy Choices: Australian consumers are increasingly seeking a wider choice and healthier options. CCL is focused on addressing this shift by introducing new low-sugar formulations and smaller portion sizes, as well as developing its non-carbonated soft drink (non-CSD) offering. Nevertheless, this shift continues to negatively affect volumes. Australian Beverages Challenges: CCL's Australian beverage business EBIT, which contributes around two thirds of group underlying EBIT, declined in 2016 after a flat 2015. Revenue continues to be affected by falling CSD sales and ongoing price competition in water, while volumes have been affected by the structural market shift and a fall in sales to operational accounts. Higher still-beverage volumes, including the addition of Monster Energy drinks, only partially offset the decline in CSD volumes. CCL's EBIT margins continue to benefit from cost saving initiatives implemented in 2014, despite the fall in overall profit, and rose to 17.1% in 2016, from 16.8% in 2015. CCL continues to look at further initiatives to stabilise the Australian business, including restructuring production facilities to achieve additional cost savings, rebalancing its portfolio and reconfiguring sales channels. Improving International Results: New Zealand reported 2016 EBIT growth of 7%, driven by its new Restaurant Brands partnership and strong results in still beverages. Indonesia's 2016 EBIT increased by 43%, or 52% on a constant-currency basis, reflecting higher sales in sparkling beverages and tea, as well as cost saving initiatives. CCL continues to invest in its Indonesian operations, funded by Coca-Cola's USD500 million investment. The increasing contribution of CCL's international businesses to group EBIT, alongside better alcohol and coffee business results, underpinned growth in 2016 group EBIT. Driver of Supermarket Traffic: Coca-Cola has remained a top product overall in supermarket trolleys for the last 15 years, notwithstanding the structural CSD market shifts. This is reinforced by studies conducted by CCL indicating that between 10% and 20% of Australian shoppers were prepared to switch retailers to buy cheaper Coca-Cola. Shareholder Returns Manageable: CCL announced a AUD350 million share buyback in February 2017 to be funded by cash on its balance sheet. Fitch does not see this as a change in CCL's financial policy, but as an opportunistic move based on the strength of CCL's balance sheet and performance expectations. We believe the share buyback is manageable within CCL's rating guidelines. Ratings Incorporate Implied Parental Support: The legal linkages between CCL and Coca-Cola, which owns 29% of CCL, are weak, while the operational and strategic relationship is strong. Coca-Cola's purchase of a 29.4% stake in Coca-Cola Amatil Indonesia strengthened these ties in 2015. Coca-Cola, as CCL's main shareholder, nominates two of CCL's 10 board members. This is reflected in a one-notch uplift to CCL's rating from its standalone rating. DERIVATION SUMMARY CCL has a smaller scale and limited diversification within the Australasia region compared with its higher-rated global peers, namely Coca-Cola FEMSA, S.A.B. de C.V. (KOF, A-/Stable) and Coca-Cola Enterprises, Inc. (BBB+/Stable). These factors account for the two and one notch differential, respectively, to CCL's standalone rating of 'BBB', despite KOF's higher merger and acquisition risk. Compared with Coca-Cola Icecek (CCI, BBB-/Stable), CCL's larger scale, better margins and exposure to developed markets offset CCI's stronger credit metrics and account for the one-notch differential between the two issuers' standalone ratings. CCL's rating benefits from its strong operational and strategic relationship with Coca-Cola, which is reflected in a one-notch uplift to CCL's standalone rating. No Country Ceiling, operating environment influence or other factors were in effect for this rating. KEY ASSUMPTIONS - CSD volumes in Australia to fall gradually - Australian dollar-Indonesian rupiah exchange rate of 10,147 in 2017-2020 - Capital expenditure of around AUD375 million in 2017 and 2018, AUD355 million in 2019 and AUD250 million in 2020 - AUD350 million share buy-back to be completed in 2017 using cash on the balance sheet - Dividend payout ratio at above 80% of net profit after tax RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action Positive rating action is not envisaged over the long-term owing to an inherent lack of diversification stemming from CCL's strategic imperative to remain a major bottler of Coca-Cola in Australasia. Developments that May, Individually or Collectively, Lead to Negative Rating Action -Fitch perceiving that CCL has become strategically or operationally less significant to its parent, Coca-Cola. - FFO-adjusted net debt rising above 3.5x (2016:1.8x) or FFO interest cover declining below 4.0x (2016: 8.3x), both on a long-term basis. LIQUIDITY CCL reported a cash balance of AUD1.4 billion in 2016, including the USD500 million proceeds for the purchase of the 29.4% stake in Coca-Cola Amatil Indonesia by Coca-Cola in 2015. Total committed banking facilities at end-2016 were AUD428 million, with undrawn facilities of AUD261 million. Contact: Primary Analyst Kelly Amato Director +61 2 8256 0348 Secondary Analyst David Cook Director +61 2 8256 0363 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 The following issuer did not participate in the rating process or provide additional information beyond the issuer's available public disclosure: Coca-Cola Amatil Limited Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021839 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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