MELBOURNE (S&P Global Ratings) Aug. 20, 2020--S&P Global Ratings today said that Coca-Cola Amatil Ltd.'s (BBB+/Stable/A-2) rating headroom has reduced due to weaker results for the six months ended June 30, 2020, because of the COVID-19 pandemic. In our view, the company's established brands and market share, good free cash flow generation, and robust liquidity underpin the company's credit quality. These strengths should also support the business through challenging industry conditions.
The Australian bushfires and COVID-19-related social restrictions have weighed on Coca-Cola Amatil's half-year 2020 results, although they remain in line with our expectations. Group EBITDA fell 19.4% to A$370.5 million as a result of lower volumes from COVID-19 restrictions. That said, the company generated robust free cash flow of A$216.7 million. Notably, Australian beverages declined 8% in volumes, and EBIT margins reduced to 9.2% as a result of a shift to lower margin channels (Grocery and National Quick Service Restaurants), increased home consumption of multiserve packs, and a sticky fixed cost base, despite some cost savings.
We believe the company can maintain an S&P Global Ratings-adjusted debt-to-EBITDA ratio of below 3.0x over the next 18 months. We forecast the company's fiscal 2021 earnings would improve from fiscal 2020 levels as a result of recovering trading conditions across key markets, despite near-term earnings pressure from recessionary conditions and a lower forecast EBITDA for fiscal 2020. Pressure in the group's higher margin On-The-Go (OTG) segment could persist through fiscal 2020; however, we anticipate the company's sales volumes and earnings to lift in fiscal 2021as social restrictions ease.
In our view, structural shifts in consumer preferences could present downside risks over the longer term. The company reported a channel mix and geographical shift from its higher margin OTG channel to lower margin Grocery channel as a result of COVID-19-related stay-at-home restrictions and shifts in consumer shopping. The latter resulted in reduction in volumes from central business districts toward suburban retail outlets. Online spending has increased as consumers are forced to stay at home, with higher purchases of lower margin multiserve branded packs and lower preferences for water, sports, and single-serve drinks. Absent the COVID-19 fallout, we believe this is an evolving trend. Key to protecting the credit quality is management's ability to further execute on cost and efficiency initiatives to offset declines in higher margin sales and volumes over the next 12 months.
The evolving situation in Indonesia and Papua New Guinea (PNG) and a protracted COVID-19-related operational disruption could detract from an earnings recovery in fiscal 2021. The company's S&P Global Ratings-adjusted debt-to-EBITDA ratio of 3.0x could be tested should the company's earnings recovery be slower and more subdued than we expect. Increasing rates of COVID-19 infection in Indonesia and PNG could crimp sales; however, the segment makes up about 11% of the group's underlying EBIT for first-half 2020, compared with Australian beverages, which makes up about 60% of underlying EBIT. The Indonesian business segment recorded a noncash impairment charge of about A$176 million in the half-year 2020.
In our view, the company is committed to its solid investment-grade rating, maintaining an adjusted debt-to-EBITDA ratio below 3.0x over the long term. Importantly, we believe the company will maintain discipline capital management initiatives, including the recalibration of shareholder returns, prudent capital spending, and continued cash repatriation in Indonesia and PNG. The company has sizable undrawn facilities of about A$630 million, no debt covenants, and a well-spread debt maturity profile.
This report does not constitute a rating action.
AUSTRALIA
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analyst: | Joel Yap, Melbourne (61) 3-9631-2196; joel.yap@spglobal.com |
| Secondary Contact: | Craig W Parker, Melbourne (61) 3-9631-2073; craig.parker@spglobal.com |
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