EUR 254.46 For Business Accounts Only

Good execution but valuation still a hurdle

A solid H1 reaffirming margin recovery is on track – CCH posted a solid H1’17 beating consensus by >14% at adj. EBIT level on the back of accelerating volume momentum, healthy price/mix growth, cost efficiencies and a more benign FX/input cost environment than initially envisaged. The extent of operating leverage is high in this business and this was reaffirmed at the H1 results as 1.4% volume growth and 4.3% price/mix drove a 150 bps EBIT margin expansion. H1 results confirmed that mgt is on track to deliver its 2020 EBIT margin target (11%, +350bps vs. 2015 levels).

 … but valuation remains the main hurdle – While we appreciate the significant growth potential and indications that profitability has reached a tipping point, we believe the expectation bar, as implied by the current price, is too high: on our estimates, the share price discounts (at 8.8% WACC) >9% EBIT CAGR over 2017-27. With the stock trading at or close to its all-time highs having substantially outperformed the sector year-to-date, we feel there is risk both from a potential de-rating and an earnings’ disappointment. Valuation is thus the main hurdle restraining our positivity on the stock.

 FX volatility goes with the territory – We have repeatedly emphasized FX volatility as a key theme of the investment case, given CCH’s exposure in markets such as Russia, Ukraine, and Nigeria (33% of group volumes). Against this background, despite the organic price/mix improvements achieved in the last 6 years, reported revenue/case switched to growth just recently after FX headwinds abated. Effectively, the ability to pass on real price increases is a challenge in inflationary countries facing devaluation.

Valuation: lifting estimates on H1 beat – Filtering through the H1 beat to our model and incorporating mgt’s revised guidance for input costs (mid single-digit raw material inflation) and FX (neutral impact in FY17), we have lifted our adj. EBIT forecasts for FY17 by c6%. The increase to our EPS is more pronounced owing to the reduction in our assumption regarding net financial expenses. Overall, we expect EBIT margins to expand 100bps in 2017e and another 170bps cumulatively over 2018-20e, thus reaching mgt’s 11% target in 2020. Our PT has been raised on the back of the upgrades to our earnings estimates and is still based on a DCF (8.8% WACC). It effectively values the stock at c19.4x 2017e reported PE, namely c15-20% discount to the current EU beverages’ valuation and the brand owner Coca-Cola (TCCC).