AUSTRALIA: UBS re-evaluates CCA after Neverfail closure

The investment bank, UBS, has cut its rating on Coca-Cola Amatil (CCA), from "buy" to "neutral" following recent share price gains, but has raised its valuation, share price target and earnings forecasts for the soft drinks bottler.

UBS said it was confident CCA would reach its target of 12% to 15% organic earnings per share growth, with UBS own forecast for the company now put at 16.7%, excluding any Neverfail contribution.

"Our unchanged divisional forecasts assume a strong domestic performance as a result of new product launches, and a relatively flat South Korean and Indonesian performance," UBS said. "We believe there is either earnings or dividend upside risk (or combination) in reconciling with Coca Cola Amatil's targeted 100 basis points minimum increase in ROIC (return on invested capital) for the year."

UBS's discounted cash flow valuation was increased to A$6.17 and its price target has gone up to A$6.50.

UBS said the upgraded forecasts and valuation followed the announcement that Amatil had finally secured 90% of the capital of Neverfail Springwater and therefore could proceed to compulsory acquisition and close its A$280m acquisition of the bottled water company.

UBS said the acquisition makes sense for CCA, allowing it to expand into the high-growth non-carbonated segment and reducing its reliance on earnings-volatile Asian operations. "We forecast Neverfail to add about A$29m in EBITA in 2004 and A$31m in 2005, and have assumed elimination of duplicate head office costs (about A$4.0m)," UBS said.

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