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Coca-Cola Hellenic| Optionality vs tail risks

Outlook weighed by Russian exposure – CCH’s high exposure in Russia and Ukraine (c21% of group EBIT) has clearly weighed on the share price and sentiment, while having already started to affect the group’s fundamentals (production suspended). The geopolitical situation is in flux entailing many moving parts and the opaque backdrop is likely to keep near term sentiment for CCH subdued.

Base case: >60% volume decline in Russia/Ukraine, 20% yoy reduction in group FY’22 EBIT – We now expect group volumes to drop 10% yoy in 2022 (ex-Egypt), driving a 20% decline in group EBIT. This is built upon >60% yoy volume drop in Russia/Ukraine, which effectively assumes that the Russian business runs down on existing Coke inventories for sparkling (accounting for the bulk of Russia volumes) in the coming weeks while continuing to sell local juice and water. Looking ahead, we assume Russia/Ukraine do not recover to pre-invasion levels until 2028. This means that our FY23 group adj. EBIT rises 15% yoy, but remains 7% below 2021 levels. We envisage FY’24 EBIT of c€850m (+3% above 2021) on 10.3% margin. Our estimates are predicated on low double-digit input cost inflation in 2022 and high single-digit in 2023, 4.6-5.1% volume growth ex Russia/Ukraine/Egypt and 2-3% price/mix.

Sensitivities – In our baseline scenario, Russia/Ukraine will be loss-making in 2022 and 2023, while not returning to 2021 levels in the foreseeable future as, even if the geopolitical situation gets resolved, the negative effects of sanctions will take time to reverse. Indicatively, it took Russia volumes 8 years to approach 2013 levels after the annexation of Crimea in 2014. We estimate that each 5% extra volume decline in these countries translates into an incremental c€30m hit to EBIT. We have also sensitized our updated forecasts for further ruble depreciation estimating that a 10 Rub/EUR movement leads to a c€5m movement in EBIT.

Valuation – The stock is down c27% since Russia’s military actions initiated in Ukraine, which is an indication that the effect from the geopolitical situation has been largely priced. Indicatively, the stock has lost about €2.5bn in terms of market cap since the beginning of the war, compared with a €1.7bn value attached to Russia-Ukraine prior to the military actions. In the light of the events, we have lowered our 2022-23 EBIT by >20% while recalibrating our valuation by: 1) removing Russia/Ukraine from our baseline DCF, identifying c€2.0 per share optionality; and 2) raising our WACC for the rest of the business to 9% to reflect elevated geopolitical risk. As a result, we have lowered our PT to €19.0 per share. Valuation-wise, the stock seems to have retreated below its long-term average, closer to the somewhat depressed valuation levels in the aftermath of the Global Financial Crisis. The risk-reward skew looks positive given the plunge in the share price – and the optionality from a potential bounce-back in Russia-Ukraine – but we are mindful that the downside tail risk from further escalation is likely to keep risk premia elevated. Against this background, we keep our Hold rating.