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Coca-Cola Hellenic | Sparkle of optimism

Strong H1’22 execution – CCH smashed consensus in H1 delivering adj. EBIT of €463m, >30% above market estimates and +32 yoy on 20bps margin expansion. Despite the precarious environment weighed by CCH’s high exposure in Russia/Ukraine (c21% of EBIT), the group has been executing remarkably well thanks to revenue growth initiatives (pricing, category and pack mix). In addition, strict operating cost control has alleviated part of the cogs/case spike (+14.1% yoy in H1). In the light of the robust H1 performance, mgt reinstated the guidance indicating an adj. EBIT range of €740-820m in 2022 (vs consensus of €727m prior to the results).

Russia/Ukraine outlook less opaque following operational changes – CCH has downsized its Russian ops to local brands (juices/water) while also taking a €190m impairment charge. It has also run down all its Coke inventories for sparkling beverages and will fully consolidate Multon (the Russian juice JV with TCCC), with mgt suggesting that the revamped Russian business will be immediately self-sufficient. Russia volumes declined by high teens in H1’22. These paint a much better picture in Russia than previously expected: indicatively, we are now eyeing a 36% volume drop in Russia in FY22 (vs >60% penciled before) which brings the business in the black.

…driving 10-17% upgrades to 2022-24e EBIT – In the light of the robust H1 results, we have raised materially our 2022-24e adj. EBIT (10-17%), reflecting the better-than-feared performance in Russia/Ukraine and significantly better price/mix. Our FY’22 revenue forecast stands at €8,268m, indicating +c15% yoy growth, driven by +c9% volume growth and +c11pp rise in price mix. The operating leverage alongside a slight profit from Russia/Ukraine, translate to an FY’22 adj. EBIT forecast of €783m, just 6% down yoy (in the middle of mgt’s guidance). We stress that this incorporates a rather tepid H2 performance, with group volumes up by a mere 1.3% and revenues by 3.5% yoy, weighed by sustained inflationary pressures and tough comps, thus driving a 33% decline in group H2’22 EBIT. We expect a somewhat challenging picture will also hold for H1’23 and thus calculate FY’23 EBIT at €852m, up by 9% yoy, reflecting a mild margin improvement of +30bps yoy to 9.8%.

Long term case remains solid – In the long-run we believe CCH remains well placed to benefit from the rebound in the NARTD market (re-opening of the on-trade channel), as well as rising consumption per capita in less developed markets, share gains and premiumization opportunities, while the group’s key merits, namely its strong liquidity and cash generation ability, remain intact.

Valuation – We have raised our PT to €24.7, filtering through the estimate upgrades and the adding back of Russia/Ukraine value in our baseline valuation. Our PT is predicated on a SOTP (ex-Russia/Ukraine business valued through a DCF at 9% WACC, Russia/Ukraine valued using multiples). The stock remains below its long-term average valuation (c9x EV/EBITDA), but near-term uncertainty remains high. We thus keep our Hold rating, noting that the risk-reward profile has improved given the Russia revamp.