Coca Cola HBC AG – Operational agility and lasting margin resilience.

Coca Cola HBC AG (LON: CCH) is an FTSE 100 listed beverage Company, which owns, operates, and control a network of independent bottling plants, warehousing, and distribution systems. The Company has a diverse and flexible portfolio of consumer-focused brands in ready-to-drink tea, coffee, snacks, water, juice, energy, and premium spirits categories. Moreover, CCH is serving around 600 million customers across 28 countries in three continents.

On 12 May 2021, the Company will release its Q1 FY2021 trading update.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

The Company had accelerated the progress of sustainable strategy by demonstrating strong growth in its low-and no-sugar variants. Furthermore, the beverages industry would provide numerous growth opportunities in the Company’s diverse portfolio and existing geographic markets. The Company had no bond maturities until November 2024.

(Source: Company Presentation)

Moreover, CCH is also working towards delivering World Without Waste sustainable packaging goals and set to deliver rPET (recycled polyethylene terephthalate) targets of using 35% rPET across the total business and 50% in the EU countries by 2025.

However, there are certain risks and uncertainties to business growth like fluctuation of the interest rates, credit risk arising from failure by counterparts, liquidity risk and cash flow interest rate risk. CCH is also exposed to overall risk regarding the volatility of financial markets. Moreover, the risk of water unavailability can lead to an increased cost of doing business. Also, the consumer environment can be weakened by the Covid-19 situation.

Industry Outlook Dynamics

According to the latest report from Research and Markets, the total market size of the global food and beverages market is expected to grow at a CAGR of 2.9% from USD 5.94 trillion in 2019 to USD 6.11 trillion in 2020. Furthermore, the market is expected to surge at a CAGR of 7% from 2021 and reach USD 7.52 trillion by 2023. The low growth during 2020 was attributed to the adverse impact of the Covid-19 pandemic. The Asia Pacific remained the largest market, with around 42% of the market share during 2019.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Coca Cola HBC AG.

Recent Developments

On 7 January 2021: The Company announced admission on the Athens Exchange and commenced trading on 11 January 2021.

A Glimpse of Business Segments (FY20)

(Source: Company Website, chart created by Kalkine Group)

Financial and Operational Highlights (for the year ended 31 December 2020, as on 11 February 2021)

(Source: Company Website)

• The Company delivered a resilient financial performance with strong execution, operational agility, and brand portfolio strength.
• CCH has improved its volume trends in the second half of 2020, with a decrease in Q4 like-for-like volume of 0.7% and full-year like-for-like volume of 4.6% YoY. On a like-for-like basis, the Company witnessed an increase in four of the largest markets volume, including Nigeria, Russia, Poland and Ukraine.
• In the second half of 2020, the Company’s at-home channel volumes increased by mid-single-digit.
• FX-neutral revenue per case was stabilised in H2 FY20.
• It has a strong positive category mix, with an increase in Sparkling of 0.2%, Adult Sparkling of 3.2% and Energy of 17.9%.
• FX-neutral revenue for FY20 declined by 8.5% (on a like-for-like basis), while reported revenue reduced by 12.7% YoY.
• However, in 2020, it made strong market share gains, with an increase of 40 bps of value share in NARTD (non-alcoholic ready-to-drink) and 30 bps in Sparkling.
• EBIT margin increased by 20bps YoY to 11.0%, while, on a like-for-like basis, EBIT margin decreased by 20bps YoY.
• Led by a small increase in financing costs and a higher effective tax rate, the comparable EPS was down by 17.5% YoY to €1.19. Moreover, the basic EPS decreased by 14.9% YoY.
• The Company has shown a strong balance sheet and liquidity position, with an undrawn available Revolving Credit Facility of €0.8 billion and cash and cash equivalents and other financial assets of €1.3 billion, as well as €0.8 billion available out of the €1.0 billion Commercial Paper Programme.
• Free cash flow surged by €54.4 million to €497.0 million as compared with the previous year, with cash generated from working capital of €108.3 million.
• The last two months of the year 2020 have rolled-out Topo Chico Hard Seltzer in five markets.
• The Board has proposed an ordinary dividend per share of €0.64, an increase of 3.2% year-on-year.
• During the last two months of the year 2020, it has rolled-out Topo Chico Hard Seltzer in five markets.
• CCH has shown a positive sign in Costa Coffee, with strong customer interest and repeats purchase.
• In 2021, the Company’s guidance remains uncertain and expects to see a strong FX-neutral revenue recovery, supported by the gradual volume recovery.
• It is planning to increase marketing investments in 2021 and is expected to achieve a small expansion in the EBIT margin in 2021 against 2020.

Financial Ratios (FY2020)

(Source: Refinitiv, Thomson Reuters)

Share Price Performance Analysis

On 22 February 2021, at the time of writing (before the market close, at 8:33 AM GMT), Coca Cola HBC AG shares were trading at GBX 2,264.00, down by 2.62% against the previous day closing price. Stock 52-week High was GBX 2,768.00, and Low was GBX 1,393.10, respectively.

From the technical standpoint, 100-day SMA (GBX 2,185.08), 100-day EMA (GBX 2,225.82), and 14-day RSI (40.60 levels) indicators are supporting the upside potential.

In the last five years, Coca Cola HBC AG’s stock price has delivered a return of ~63.74% as compared to a ~8.56% return of FTSE 100 Index and a ~51.31% return of FTSE All-Share Beverages Index, which shows that the stock has delivered a decent return as compared with the benchmark sector and the benchmark index.

The Company’s stock has delivered a positive return of around 11.42% and 20.81%, respectively, in the last six months and nine months.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Group had managed to deliver a resilient business performance during FY20 despite numerous challenges that emerged from the Covid-19 pandemic and Brexit. The sales remained encouraging throughout the second half of FY20, driven by robust growth in at-home and out-of-home markets. Furthermore, the Company had highlighted its concerns regarding economic uncertainty. However, CCH would continue to grab opportunities in the direction of achieving long-term growth. Moreover, the Board had declared a decent 3.20% growth in the dividend during FY20 as compared to FY19, illustrating long term confidence in its outlook. CCH had anticipated a strong recovery in FY21 FX-neutral revenues and a decent growth in FY21 EBIT margin. The Company would increase its marketing investment in FY21 with regards to its top-line recovery. The adverse impact of foreign currency on EBIT would be higher in 2021 from the levels of 2020.

CCH had identified restructuring initiatives of approximately €26 million during FY21, which would drive €10 million of annualised benefits starting from FY21 and beyond. The Company had anticipated financing cost to reduce by 10% during FY21 as compared to FY20. Overall, CCH would continue to focus on efficient cost management to drive its profitability in 2021.

Considering the resilient performance, strong value share gains, structural improvements to cost base, volume and revenue trends stabilised in H2, sustainable cash generation capabilities, strong H2 recovery in 75% of the portfolio, improvement in the working capital, robust balance sheet, expects to achieve a small expansion in like-for-like EBIT margin, sound business model, consistent dividend payments from the last 10 years, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Coca Cola HBC AG at the current price of GBX 2,264.00 (as on 22 February 2021, before the market close at 8:33 AM GMT), with lower-double digit upside potential based on 23.25x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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