Coca Cola HBC AG (LON: CCH) – Decent Dividend Yield and Expected Growth Across All-Three Segments Holds Significant Upside Potential

Coca Cola HBC AG is a FTSE 100 listed Beverage Company, which owns, operates, and control a network of independent bottling plants, warehousing, and distribution systems. It is mainly involved in producing, distributing, and selling non-alcoholic ready-to-drink beverages as a bottler, under the agreement with The Coca-Cola Company. It also markets its own brands of water and juice beverages. In addition, it also distributes beer in Macedonia and Bulgaria and distributes some third-party premium spirit brands in certain markets. It is known as one of the leading bottlers of The Coca-Cola Company and delivering soft drinks since 1981. The Company operates in around 28 countries, serves 197 brands in a diverse portfolio to serve nearly 615 million potential customers. It has a vast manufacturing footprint with 52 plants, 257 filling lines, and 148 warehouse and distribution centres. The Company has been admitted to trading on the London Stock Exchange since 29^th April 2013. It is headquartered in Switzerland and has a secondary listing on Athens Exchange.

On 5^th August 2020, the Company is expected to announce its half-yearly results for 2020.


(Source: Presentation, Company Website)

Key Fundamental Statistics



Segment Analysis – Balanced Portfolio

The Company caters through one primary business, being the production, distribution, and sale of ready-to-drink beverages.
 

1. Established markets: Comprises of Austria, Cyprus, Northern Ireland, Greece, the Republic of Ireland, Italy, and Switzerland.

2. Developing markets:Lithuania, Poland, Estonia, Hungary, Latvia, Croatia, Czech Republic, Slovakia, and Slovenia.

3. Emerging markets:Nigeria, North Macedonia, Romania, the Russian Federation, Serbia, Armenia, Belarus, Bosnia and Herzegovina, Ukraine, Bulgaria, and Moldova, Montenegro.
 

The net sales per reportable segment for FY2019 is presented below:


(Source: Annual Report, Company Website)

Measuring Performance Against Strategic Objectives by Using Non-Financial KPIs

In FY19, the total volume grew by 3.3 per cent or 2.6 per cent, excluding Bambi. Also, the Company’s employee engagement outperformed the high-performance norm. Moreover, the Company is well on track to meet its sustainability commitments of Mission 2025, which can be seen in the image below:

 
(Source: Annual Report, Company Website)

Synopsis of Recent Developments

12^th June 2020: The Company admitted 321,527 ordinary shares under the stock option plan, which will commence trading on the Athens Exchange on 16^th June 2020.

14^th May 2020: The Company will hold its annual general meeting (AGM) on 16^th June 2020 in Switzerland. The AGM is expected to declare a dividend of EUR 0.62 per each ordinary shares. The payment is the dividend is anticipated to be made on 28^th July 2020.

11^th May 2020: The Company announced that its published prospectus for €5,000,000,000 Euro Medium-Term Note Programme, has been approved by the UK Financial Conduct Authority.

Top Shareholders Statistics

 

Trading Update for Q1 FY2020 with Robust Balance Sheet and Sufficient Liquidity


(Source: Quarterly Report, Company Website)
 
On 7^th May 2020, Coca-Cola HBC AG released an update on the trading performance for the first quarter of the financial year 2020. The Group is focused on ensuring the health and safety of its employees, customers and business continuity. The trading in the months of January and February remained strong, while in March due to imposed lockdown, the performance declined as it impacted the out-of-home channel. The Group’s FX-neutral revenue in the first quarter of the financial year 2020 declined by 1.2 per cent, while the volumes surged by 3.1 per cent for the period. The FX-neutral revenue/case declined by 4.1 per cent. CCH managed to increase its share in the majority of markets in which it operates, and revenue growth is affected by the severity and timing of lockdowns. In Established markets, the FX-neutral revenue declined by 7.2 per cent, and the volume declined by 5.5 per cent. In Developing markets, the FX-neutral revenue declined by 2.9 per cent, and volume increased by 1.8 per cent. In the Emerging markets, the FX-neutral revenue increased by 4.8 per cent and volume increased by 8.1 per cent with double-digit volume growth in Nigeria. In the month of April 2020, the FX-neutral revenue declined by 37.2 per cent, and volumes fell by 27.3 per cent, as every market entered lockdown. The expected impact of raw materials and foreign exchange in the year 2020 remained unchanged as weaker FX offset lower commodity costs. CCH has taken measures to re-prioritise investments and reduce costs. The balance sheet remained strong, with adequate liquidity to meet financial commitments.
 
Financial Highlights – Decent Growth in Cash Flows (31^st December 2019)


(Source: Annual Report, Company Website)
 
For the full year as ended on 31^st December 2019, the Company’s volume increased by 3.3 per cent to 2,265 million-unit cases as compared to 2,192 million-unit cases in FY2018. On a reported basis, the net sales revenue increased by 5.5 per cent to EUR 7,026 million in FY19 against EUR 6,657 million in FY2018. The operating profit increased by 11.9 per cent to EUR 715 million in the financial year 2019 versus EUR 639 million in FY2018. The comparable EBIT surged by 11.5 per cent to EUR 759 million in FY2019 from EUR 681 million in the financial year 2018. The net profit stood at EUR 487 million in the financial year 2019 versus EUR 447 million in FY2018, reflecting an increase of 9 per cent. The comparable net profit surged by 8.7 per cent to EUR 522 million in FY2019 versus EUR 480 million in FY2018. The comparable basic earnings per share stood at 1.436 cents in FY2019 versus 1.306 cents in FY2020. The Company has generated a decent free cash flow of EUR 442.6 million in FY19, an increase of 19.6% against EUR 370 million in FY2018. The Board of the group recommends an ordinary dividend per share of €0.62.

Financial Ratios – Decent Profitability for FY2019 versus FY2018

 

The reported EBITDA margin, Operating Margin, Pretax margin and Net margin stood at 16.2 per cent, 10.2 per cent, 9.4 per cent and 6.9 per cent, respectively, for the financial year 2019. Reported profitability metrics were higher against the last year data for the same period. Return on equity for the financial year 2019 stood at 16.80 per cent, which was higher than the Industry Median. On the liquidity front, Coca Cola HBC AG’scurrent ratio was lower than the industry median of 1.33x. On leverage front, the debt-equity ratio of the Coca Cola HBC AG’swas 1.23x, which was higher as compared to the industry median of 0.40x.

Share Price Performance Analysis


Daily Chart as on 15^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On June 15, 2020, at the time of writing (before the market close, at 9:51 AM GMT+1), Coca Cola HBC AG shares were trading at GBX 2,023.00, down by 1.61 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,950.00/GBX 1,393.10.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently hovering in an oversold zone and carry the potential to trigger an upside bump in the stock price.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare Coca Cola HBC AG with its peers, Price/Earnings multiple has been used. The peers are Fevertree Drinks Plc (NTM Price/Earnings was 42.18), Reckitt Benckiser Group Plc (NTM Price/Earnings was 22.42), Nichols Plc (NTM Price/Earnings was 21.64), Unilever Plc (NTM Price/Earnings was 18.14) and Britvic Plc (NTM Price/Earnings was 15.55). The Average of Price/Earnings (NTM) of the company’s peers was 23.99x (approx.).

Method 2: Price/Cash Flow Approach (NTM)
 
 


To compare Coca Cola HBC AGwith its peers, Price/Cash Flow multiple has been used. The peers are Diageo Plc (NTM Price/Cash Flow was 23.25), Unilever Plc (NTM Price/Cash Flow was 14.96), A.G.Barr Plc (NTM Price/Cash Flow was 14.35), Stock Spirits Group Plc (NTM Price/Cash Flow was 11.19) and British American Tobacco Plc (NTM Price/Cash Flow was 7.99). The Average of Price/Cash Flow (NTM) of the company’s peers was 14.35x (approx.).

Valuation Metrics


(Source: London Stock Exchange)
 
As on 29^th May 2020, EV to EBITDA multiple of the Coca-Cola HBC AG was around 9.0x, which was lower as compared to the industry. It reflects, shares are undervalued against its peers. 


(Source: London Stock Exchange)

This analysis is a useful procedure to decompose the various drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to assume whether the company’s profitability, use of debt or assets that are driving ROE.

Coca Cola HBC AG Vs FTSE-100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Coca Cola HBC AG share price has delivered 52.37 per cent return as compared to negative 10.85 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last five years.

Industry Outlook Dynamics

As per the Global data publication of 2018, the Non-alcoholic ready-to-drink industry was valued at EUR 69 billion, wherein Sparkling category represented EUR 23 billion, and hydration beverage market represented EUR 20 billion in market size. According to the June edition of Market Research Future report, the market size of the global Non-Alcoholic Beverages Market is expected to reach USD 1,073.9 billion by the end of 2024, representing a growth rate of 4.61 per cent from 2019 to 2024. The demand for healthy drinks without altering the taste will propel the market growth in future.

Growth Prospects and Risk Assessment

As per Nielsen data for YTD April 2020, the Company has 54 per cent of market share in its market under the sparkling category, while in the overall non-alcoholic ready-to-drink industry, the Company has 27 per cent market share. Further, the Company has a flexible and broad portfolio of brands to serve 24/7 across all occasions. The Company is expanding its business into the coffee market as it opened Costa Coffee outlets in 3 markets in May 2020 and plan to launch outlets in 7 more countries in July and Q4 FY20.


(Source: Presentation, Company Website)

The Company aims to produce high-quality products and services for the esteem clients. The Group had strong financial disciplines, which helped them to have a robust and effective balance sheet position. Investment in future business helps in achieving further sales growth and operational efficiencies. The Company using its cost synergies had optimised its operational structure to achieve sustainable growth in the near term. The Group is identified as amongst the leading bottlers of drinks globally and has a strong foundation for growth in the long-term period.

However, the growth of the Company is subject to certain risks, such as increasing health awareness, rising regulations and demand for nutrition-oriented products can affect the market of carbonated drinks significantly.

 
(Source: Presentation, Company Website)

To meet the new regulations, the Group needs to implement new processes, failing to do so would increase the compliance risk. Acquisitions to match rapid transformation may increase integration risk and expected synergies may not be achieved. Any change in the regulations and government policies could affect the overall business of the company.

Business Outlook Scenario

The Group entered the financial year 2020 with positive momentum and showed decent performance in the month of January and February before the lockdown was imposed. In the first quarter of the financial year 2020, the group witnessed an increase in FX-neutral revenue and volume from Emerging markets with double-digit volume growth in Nigeria. In the Developing market, CCH managed to increase volume by 1.8 per cent. The Group managed to increase its share in the majority of markets in which it operates during the Q1 FY2020 period.

In the financial year 2019, the company saw a year of stronger FX-neutral revenue growth combined with ongoing EBIT margin expansion. In all the segments, the group achieved faster volume growth in 2019. The Company has a strong balance sheet with adequate liquidity to meet the financial commitments.

Though the outbreak of COVID-19 adversely impacted the company’s financial performance, the group continues to make an investment in its Brands to get maximum benefits as consumer demand recovers. Going forward, CCH is expecting to generate decent net sales growth. Also, the Group has decent fundamental metrics as it has maintained an EBITDA margin above 14 per cent from last many years. CCH strategy is based on Occasion, Brand, Package, Price and Channel (OBPPC) and help its customers in choosing the right product, at the right price and in the right pack as per the occasion.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from EUR 6,346.10 million in FY15 to EUR 7,026.00 million in FY19. Compounded annual growth rate (CAGR) stood at 2.58 per cent.

Based on the decent fundamental prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current market price of GBX 2,023.00 (as on 15^th June 2020, before the market close at 9:51 AM GMT+1), with lower double-digit upside potential based on 23.99x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 14.35x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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