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Coca-Cola Hellenic | Sweet quarter, sweeter 2021

Solid Q3 on improved volumes and price/mix… – CCH managed to grow LFL volumes +1% yoy in Q3, with solid performance in both developing and emerging markets, on a slightly negative price/mix (FX neutral) of -1.2% yoy (vs. -6% yoy in H1). This led to a sequential deceleration in the revenue decline (to -6.7% from -15.5% in H1). Underpinning the top line sequential improvement were the recovery in the ‘out-of-home channel’, the improvement in the pack and category mix and pricing initiatives.

… further supported by favorable input cost environment and cost rationalization – The resurgence of stricter lockdown measures across several markets, driven by the spike in coronavirus cases, is poised to put once again pressure in the ‘out of home channel’. On the other hand though, profitability and margins will be underpinned by additional cost savings of €20m (on top of the c€40m anticipated previously to feed into H2’20), a sustained favorable input costs environment and a strong package mix. Against this background, we have raised our FY20 EBIT c2% to €610m, on a 9.9% respective margin, anticipating an enhanced EBIT margin in H2’20 (+0.4pp yoy).

2021 visibility remains limited, but several reasons to be cheerful – Looking ahead into 2021, economic activity across CCH’s territories is set to bounce back markedly, boosted further by the hopes for a coronavirus vaccine. However, in the near term, visibility on the evolution of the 2nd wave and respective restrictions, especially in the ‘out-of-home’ channel, remains low. This could weigh on Q1’21 growth, but, overall, the low base effect on the seasonally important Q2 and an anticipated normalization in H2’21 will drive a 9% yoy growth in FY21 revenues on our estimates, which will shape c5% lower than 2019 levels. On the profitability side, the positive leverage will drive margin accretion, partly offset by a more precarious FX/input costs backdrop and the margin dilutive impact from upcoming sugar/plastic taxes in Poland/Italy (albeit with limited net effect on absolute EBIT). Overall, our FY21e envisage adj. EBIT of €714m, +17% yoy, on a 10.7% respective margin (+0.7pp yoy). Our new FY21 EBIT estimates are in line with Vuma consensus.

Long term case remains solid – CCH remains well placed to benefit from the return to growth of the NARTD market, recovery of CSD consumption per capita, market share gains and product innovation, taking advantage of the structural changes in consumption habits in the post-covid era (‘at-home’ channel) with great adaptability. The solid balance sheet also offers optionality for value-accretive M&A.

Valuation – Following the upward earnings revisions, we have lifted our PT (DCF-based) to €25.5, effectively valuing CCH at c25% discount to the brand owner TCCC. With the current share price discounting EBIT CAGR of c7% in the medium-term (after the covid impact recedes), we believe the current price already reflects the merits of the thesis. We see limited upside risk to this medium term EBIT forecast unless the macro/FX backdrop proves far more benign than our estimates incorporate.