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 that wants to avoid 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 each 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 as though 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. Indeed, the net impact may well prove quite dramatic since these venues are completely closed down in some places. This ‘out of home’ channel accounts for circa 40% of sales in some markets according to management guidance. Heck, Italy alone accounted for €900m worth of company revenue last year, and it is still under complete lockdown. If the ‘out of home’ market is worth 40% of sales, then we could be looking at a €360m revenue hit just from that one market alone.
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. I mean, Coca-Cola HBC made a net profit of €500m last year on the back of €7b in sales. This year? Yeah, I have no idea what things will look like, and nor does the company (or indeed anyone else) at this point. Most UK-listed stocks are in a similar boat with regards to profit guidance.
Anyway, the first thing to remain optimistic about is the state of the balance sheet. Fortunately, Coca-Cola HBC is in quite strong financial health. The company reported around €1.7b worth of debt net of cash & short-term investments at the end of last year. Let’s call it around 1.55x EBITDA of circa €1.1b, which is a reasonably conservative amount of leverage.
A few other things to consider while we are on the subject of debt. Firstly, only around €660m of it is due in 2020. With over €1.5b in cash and short-term investments sitting on the balance sheet, liquidity looks ample here. In fact, the firm 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 in terms of cash outflow based on around 365m shares in issue. Secondly, the cost of debt is relatively cheap here. The company paid just over €70m in finance costs last year, which works out to just 10% of operating profit.
The second thing to like is the stock’s valuation. Coca-Cola HBC shares trade around the 1,700p 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, but still. I won’t bother with any kind of forward earnings estimates since the situation is too volatile.
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 above numbers implies annual EBIT of around €1.1b 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 you end up with a £25 stock price based on today’s exchange rates. Furthermore, we could reasonably expect the company to pay out another £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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