Sector financial performance:

This company, which primarily produces and sells beverage concentration and finished sparkling and still beverages of their owned brand, has been grouped into non-alcoholic beverage sector.

It seems that companies in this sector are experiencing changes in consumers’ taste and the transmissions of those changes across global markets as the total trend of consumers’ preference is shifting to non-carbonated beverage from traditionally dominating sparkling products. Sales volume data indicates that demand for CSD beverage has been declining globally with an annual rate of about 1% and the demand for non-carbonated beverage increased about 4% annually in the past several years. The global decline in demand for CSD is particularly due to large decline in developed market. For example, the decline in CSD beverage in US market led the whole volume in this market go down by 2-4% in 2016/17 while the decline seems to be being offset by picking up of non-carbonated beverage in 2018.  Globally, driven by increasing in developing market in both CSD and non-carbonated categories, the demand has been increased as indicated by 1-2% annual growth in volume. Accompanying with declining demand for traditional sparkling beverage, we have seen the average price has been rising at an about 2-3% rate globally in the past several years and the price growth rate is lower in US market (1-2%) during the same period. The rising average price has resulted from rising unit price and product mix’s shifting to higher price products.

As a result, as described above, of the changes in consumers’ shifting away from carbonated beverage in US market, the declining demand for CSD beverage hurt more the bottling only companies than brand beverage companies in this industry as indicted by these bottlers’ declining growth rate of can/bottle volume and shrinking gross margin according some of typical bottlers.

Due to strong demand and as well the fact that only a few of brands are dominating market, for those brands owners and manufacturers of beverages the gross margin and operating margin have been kept at high level and seemed to be being improved. In the past several years, with favourable product mix shifting to high price products and reducing commodity costs and business shifting to higher margin operating (franchise), the average gross margin of typical companies in this sector reaches almost to 60% and operating margin to 22%.

However, when talking about the bottlers who have no own brands, their gross margins seem to have decreased largely (down by about 600 basis points in gross margin and by 500 basis points in operating margins, according to a typical bottler). Obviously, the increased margin resulted from shifting of product mix as seen from brand companies was not transferred to bottling sector or at least to some of bottlers who were not able to flexibly adjust their business to adapt new changes in demand.

According our analysis, brand companies’ enterprise price/adjusted EBI is around 31 in a range of 29-35 with interest/EBI ratio of 7%.  Bottlers/private label companies’ enterprise price/sales is about 0.7 with gross margin of 34% and EBI/sales ratio of 0.5%.

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Company performance:

It seems that demand for this company’s still beverages products has been increasing in the past four years as indicated by its case volume data for still beverages, which has grown at an average annual 3-4% rate. Demand for its sparkling beverage has presented a downward trend as indicated by either the flat growth or decrease in case volume of sparkling beverage in the past four years. Therefore, we have seen a slight growth in terms of its whole bottle volumes (0-3% annual rate) during this period of time. The decreasing concentrates volume seems consistent with decrease in demand for sparkling beverages. The average selling price has been increasing probably due to the products mix shifting to higher price products. This company has also been seen to continuingly re-franchise its bottling business.

For the first nine months of fiscal 2018 compared with same period of 2017(ended 20180928)

The organic sales (excluding currency and acquisition) of this company increased about 5%  primarily attributable to the increase of 3% in volume and increase of 2% in price and products mix.

For fiscal 2017 compared with 2016

The organic sales (excluding currency and acquisition) of this company increased about 3%  primarily attributable to the increase of 3% in price and products mix.

The organic sales(excluding currency and acquisition) of this company increased about 2% in first six months of 2017 compared with the same period of 2016  primarily attributable to the increase of 3% in price and products mix offset by decrease of 1% in concentrates volume ( case volume flat).

The organic sales(excluding currency and acquisition) of this company increased about 4% in 2016 compared with 2015  primarily attributable to the increase of 3% in price and products mix and increase of 1% in in unit case volume ( concentrates volume flat).

The organic sales(excluding currency and acquisition) of this company increased about 3% in 2015 compared with 2014  primarily attributable to the increase of 2% in price and products mix and increase of 1% in unit case volume and concentrates volume.

As a result of continuingly spinning off its bottling business, we see largely improved gross margin in the past several years. Its gross margin is about 64% in 2018. While increasing spending in advertising, its SG&A has decreased. This company’s operating margin increased to 31% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 35($49/share), which we think, is relatively fairly valued compared with its peers considering its stronger demand and improvement in margin.