NO SUGAR TAX
THE sugary beverage tax in Australia is off the table for now, but it is still a risk for CocaCola Amatil, Morningstar analyst Adam Fleck says.
Australians were drinking fewer soft drinks, a trend likely to continue.
Consumption was forecast to fall at 3% to 4% annually for carbonated beverages and CocaCola was likely to experience its fair share of pain as the market leader.
Despite growth from a push into noncarbonated beverages, such as juice and bottled water, volumes in the company’s Australian segment were forecast to fall at a 0.2% annual clip for the next five years, he said.
The trend was not new. Soft drink consumption had fallen at an approximate 3% annual rate since 2012, according to GlobalWatch.
‘‘We see a greater risk from increased government involvement in this category.’’
Taxes on sugarsweetened beverages, or SSBs, had increased in recent months as the United Kingdom, Ireland and South Africa joined 26 other countries and several US cities to have instituted levies ranging from 10% to 20%, depending on the drink’s sugar content, Mr Fleck said in a research note.
‘‘We don’t expect a similar tax in Australia in the near term. Both the Liberal and Labor parties have so far refused to support such a proposal.’’
Morningstar had maintained its $A9.40 ($NZ10.10)ashare fair value estimate on Amatil.
In early June, a panel of independent experts at the World Health Organisation (WHO) stopped short of recommending a tax on the drinks, given nonconsensus views. In October 2016, the organisation had recommended governments adopt a 20% tax.
A tax on SSB, if imposed, would have a negative impact on Amatil’s Australian volume, Mr Fleck said.
SSB products made up more than twothirds of the company’s volumes last year. While the alternative, nontaxed products would receive a boost, it was estimated a 20% tax would cause Amatil’s volumes to fall 15% in the first year of implementation.
Alongside lower profitability, shares would be worth about $A8.60, about 9% lower than the base case.
Mexico, one of the world’s leading sodaconsuming nations, instituted its tax in 2014, equating to about a 10% price rise.
Volumes of affected product subsequently fell 6% in 2014, and another 10% in 2015, suggesting price elasticity of about negative 0.76, on average.
Studies in other countries, including the US, Brazil and France, suggested price elasticity could be higher at negative 1.3, Mr Fleck said.
Partly offsetting the volume shock to SSBs, the nontaxed beverages in Mexico grew 2.1% on average over the two years following the levy, as some customers switched to a substitute rather than reducing consumption.
Amatil had actively worked to expand its portfolio of nonsugary beverages, including diet sodas, bottled water and alternatively sweetened products. The company might see a greater benefit for those sales than currently assumed, he said.
‘‘But at less than 30% of total volume, growth here is not enough to offset the substantial drop we see in taxed beverages under such a scenario.’’
Although a sugary beverage tax in Australia would be negative to Amatil’s valuation, such a scenario was unlikely to upend the company’s economic advantage.
Coke would continue to enjoy brandled pricing premiums in its affected product versus rival PepsiCo in Australia which would face similar pressure on its sugary beverages, Mr Fleck said.
Amatil’s volume would remain well above the combined soft drink offerings of Pepsi and local partner Asahi, despite any sizeable decline in volume.
Coke would also remain one of the largest soft drink providers to retailers in Australia.
Morningstar expected the company’s solid relation with customers would preserve Amatil’s ability to garner premium shelf space, launch new products and maintain profitability.
The company was expected to provide a return on invested capital averaging 12% under such a scenario, about a percentage point lower than in the current base case.