Coca-Cola HBC: Braced For Short-Term Uncertainty

by The U.K. Income Investor

Like most stocks, Swiss-based bottler and FTSE 100 member Coca-Cola Hellenic Bottling Company (CCH) faces almost unprecedented uncertainty. In theory, it is supposed to be a defensive play. I mean, the company produces, bottles and distributes finished products for The Coca-Company in around thirty different countries, mostly in Central and Eastern Europe. Its business model ought to be perfect for anybody worried about the cyclical nature of the economy. 

That last statement would almost certainly hold true if this were any normal downturn. Coca-Cola HBC would carry on selling millions of unit cases of Coke, Fanta and Sprite every day regardless of the ups and downs of GDP. However, I stressed the ‘in theory’ part above because the COVID-19 virus won’t cause a conventional recession. Indeed, it looks like it may temporarily collapse the services and tourism sectors in a myriad of countries worldwide.

As a provider of Coca-Cola Company beverages to bars, restaurants, clubs, hotels and so on, Coca-Cola HBC will see a hit to its business for obvious reasons. With these venues completely closed down in some places, the net impact may well prove quite dramatic. This ‘out of home’ channel accounts for circa 40% of sales in some markets according to management guidance.

Despite the above, there are a couple of good reasons to remain optimistic with regards to the company’s prospects. I’ll mostly skip talking about its profitability since it is almost impossible to get a handle on the numbers right now. The company reported a total of just over €7,000m worth of sales across its geographical markets last year. Around €500m of that ended up as bottom line net profit.

I have no idea what that will look like this year, and nor does the company (or indeed anyone else). Most UK-listed stocks are in a similar boat with regards to profit guidance. Heck, Italy alone accounted for €900m worth of company revenue last year. It is still under complete lockdown for well known reasons. If the ‘out of home’ market is worth 40% of revenue, then Coca-Cola HBC could be looking at a €360m revenue drop just from that one market alone.

The Balance Sheet

The first thing to remain optimistic about is the state of the company’s balance sheet. Fortunately, Coca-Cola HBC is in strong financial health. Its balance sheet reported around €1,700m worth of debt net of cash & short-term investments at the end of last year. Call it 1.55x EBITDA of circa €1,100m. In my book that is a reasonably conservative amount of leverage.

A few other things to consider while we are on the subject of debt. Firstly, it only has around €660m due in 2020. With over €1,500m in cash and short-term investments sitting on the balance sheet, liquidity looks ample. In fact, Coca-Cola HBC still intends to propose a €0.62 per share ordinary dividend at its 2020 AGM in June. I have that equal to an additional €225m cash outflow based on around 365m shares in issue. Secondly, the relatively cheap cost of its debt. The company paid just over €70m in finance costs last year, which works out to just 10% of operating profit.

Valuation

The second thing to like is the stock’s valuation. Coca-Cola HBC shares trade around the 1,700 pence per share mark at time of writing. I make that equivalent to around 14x last year’s net profit per share. Granted, we have no idea how bad this year will look. I won’t bother with any kind of forward earnings estimates on that basis.

That said, and due to the somewhat unique nature of this crisis, we can reasonably expect this business to rebound very quickly. As mentioned above, this is an inherently stable business because demand for Coca-Cola Company products is so robust. A recession would barely register a dent in its annual volume figures in any other situation. I expect it to be business as usual here once the lockdowns are lifted, irrespective of how sluggish the wider European economy remains.

On that note, check out the company’s targets out to 2025. Admittedly this was pre-COVID-19, but it shouldn’t alter much assuming the social impact doesn’t drag on for more than a few quarters. Those targets included constant currency revenue growth in the 5% per annum range, with EBIT margin growth in the 30 basis points per annum area. Crunching the numbers implies annual EBIT of around €1,110m by 2025.

We could be looking at profit of around €1.90 per share by then assuming net profit grows in tandem. Tag a 15x multiple on that, and we’d be looking at a share price in the £25 range based on today’s exchange rates. Furthermore, we could reasonably expect the company to pay out a further £3.50 per share by way of cash dividends in the intervening period. For a reliable consumer defensive business backed by the world’s greatest brand, that strikes me as a good deal for anyone who can brave some short-term uncertainty.

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