Friday, 14 February 2014

Coca-Cola Hellenic Bottling - an update

I last looked at London-listed but central/southern/eastern European focused bottling/distribution company Coca-Cola Hellenic Bottling back in November concluding that:

'With an EV of around Euro9bn the company is still trading on around x20 EV/ebit.  I noted in my previous piece that a return to historic peak profitability would pull this ratio down to around x12 EV/ebit which would be a more reasonable number.  The problem is - as the company themselves said - having the right environment to do this...The c. 1500p level seen in July pre the FTSE100 index squeeze still seems more appropriate' 

Well, after their Q4/FY numbers today, the shares are in the 1500s...so what to do?


Well whilst there was not any growth or margin improvement around, ebit margins and cash flow did both make some progress...

...and this was led by pricing as shown by the rises in the 'currency neutral revenue per case' for all the company's operating regions.  Despite weak top-line progression, this company at least does have pricing power.


What is particularly noteworthy from the above is that certain zones (as defined by the company) are doing better than others.  As shown in detail in my previous notes on the company (see the link above), 'established' is Italy, Greece and Switzerland, 'developing' is Poland, Hungary and the Czech Republic whilst 'emerging' is Russia, Nigeria and Romania.  Particular stand-out performers in the latter group were Russia and Nigeria.  Overall though a small improvement can be seen at the volume level in Q4.

In terms of outlook, the extra FX burden is perhaps inevitable given well-publicised emerging market currency volatility.  The cash flow reiteration is interesting and does suggest that the company is heading towards (at the current market cap) at 7%+ free cash flow yield...which is not be sniffed at.

Additionally it is important to remember the strategic positives that the company is exposed to, nicely summarised by this presentation chart. 

At today's EV (£7.1bn) the shares still trades, using the FY13A numbers, on a mid x15s EV/ebit ratio.  Clearly today's numbers are not indicative of the medium-term potential of the company...but clearly conditions are not exactly ideal either.  Nevertheless, the free cash flow reiteration and the pricing power are both positive and shareholder returns are generally improving too with the yield now just under 2%.  Taking everything into account, I covered half my short position in the company today, with the intention of covering the other half - certeris paribus - at 1500p or below.  It has been a good one...but risk-reward is changing and evolving.

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