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Coca-Cola Hellenic | Sweetening outlook; Raise to Buy

Rating: Buy from Hold
Target Price: EUR 30.80 from EUR 28.50

Stellar H1’23 performance… – CCH delivered a strong H1, with organic EBIT +17.7% yoy at €561m, thanks to +18% growth in organic revenues. The company enjoyed stronger than anticipated operating leverage managing to expand adj. EBIT margins by 20bps (to 11.2%) despite the multiple challenges (affordability pressures, Nigeria cash crisis). This came as a result of the significant price/mix growth (+19pps yoy and c2pps above consensus) and CCH’s solid operational execution, with the group gaining market share while continuing to grow higher-margin segments (coffee, energy).

… triggered upgrades in 2023 guidance… – In view of the strong H1, CCH mgt had already revised its FY’23 guidance higher in July, calling for +9-12% organic EBIT growth in 2023, effectively indicating adj. EBIT >€1bn. Guidance was reiterated post H1 results, with key underpinning factors summarized to: 1) upgraded organic top line growth in the low teens (vs high single digits previously) and 2) lowering of 2023e COGS/case inflation expectations to a high single-digit rise (vs low-teens seen before).

… leading us recalibrate our forecasts, landing at the high end of the guided range – We raise our 2023e adj. EBIT 7%, led by a 1% upgrade in our revenues estimate and topped by lower than anticipated costs, despite adverse FX. In specific, we model almost flat organic volume growth and 14.8pps organic price/mix looking for a +15% organic sales rise. Assuming some 3.5pps from scope and a negative c6pps from FX, we end up with €10,179m revenues (+10.7% yoy) in 2023. We also trim our costs/case assumption (to +7-8pps yoy). The aforementioned result to a 2023e adj. EBIT of €1,029m (+10.7% yoy, +12% organic, on flattish margins), at the top end of guidance.

Operating leverage remains more pronounced looking ahead, albeit now cycling a higher base – With CCH having taken noticeable pricing in 2022 and 2023e, we prefer to maintain a relatively conservative stance looking further out. We pencil in 3-4% organic price/mix in 2024-25e, coupled with more balance volume growth and low-to-mid single digit growth in COGS/case. This translates to organic revenue growth of 6% annually and c8% adj. EBIT growth in 2024-25e, with EBIT reaching €1.1bn and €1.2bn respectively. Looking further ahead, we input a 7.2% medium-term EBIT CAGR, with the respective margin near 11% by 2027.

Valuation: raise to Buy; de-rating since 2019 despite EBIT >35% higher than the 2019 mark – The enhanced short-term outlook feed into a higher valuation, with our PT set at €30.8/share (from €28.5). This is predicated on a DCF where we use a lower WACC of 9.2% (reflecting the reduced weight of Russia in profitability). Valuation-wise the stock remains below its long-term average valuation of c9x EV/EBITDA and at >25% discount vs EU beverages, effectively still incorporating an elevated risk premium due to its emerging market exposure. We believe that at the current price CCH is sufficiently de-risked (material de-rating since 2019 despite EBIT set to shape >35% higher than in 2019) as the current price discounts just c4.5% EBIT CAGR over the next 8 years, quite a pessimistic scenario in our view. As such, we raise the stock to a Buy.