CCH, KO

Greek Contrarian Opportunities: Coca-Cola Hellenic (NYSE: CCH)

(This is a highly-abbreviated version of a full SumZero report republished with the author's consent)

Contributor: Abdulaziz Alnaim
Firm: Mayar Capital Management
Location: Riyadh, Saudi Arabia

Recommendation: Long Shares of Coca-Cola Hellenic (NYSE: CCH)
Timeframe: 2 Years and Beyond
Recent Price: $15.26
Target Price: $25.00

Strategy: Value

Quick Thesis:
Coca-Cola Hellenic ("CCH") is one of the world's largest Coca-Cola bottlers (2nd largest by volume) and it's primary listing is on the Athens Stock Exchange (Symbol EEEK) with an ADR on the NYSE. It operates in 28 countries that it splits into three segments:

1- Established Markets (pop: 89m, 41% of revenues, 47% of EBIT): Austria, Cyprus, Greece, Italy, Northern Island, Republic of Ireland, Switzerland

2- Developing Markets (pop: 78m, 17% of revenues, 14% of EBIT): Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia

3- Emerging Markets (pop 401m, 42% of revenues, 39% of EBIT)): Armenia, Belarus, Bosnia, Bulgaria, FYROM, Moldova, Montenegro, Nigeria, Russia, Serbia, Ukraine

The stock has been dumped by investors because of its "perceived" exposure to Greece, where the company is headquartered. In reality, Greece represents a mere 6% of revenues and around 7% of income. The company has a very diversified portfolio of markets and whatever happens to Greece, CCH will continue to generate decent growth over time.

Nonetheless, CCH does face several headwinds like austerity measures in many of its markets and higher input costs, which many bottlers and consumer product companies have been complaining about lately. Historically, those companies, including CCH, have been able to pass on the higher costs to consumers because of the strength of their brands. Given the economic environment in many of CCH's markets, it hasn't been able to pas on all of the higher costs so far, but I believe that over the long-term it will be able to.

I believe CCH has a strong economic moat and barriers to entry because of its exclusive multi-year bottling agreements with Coca-Cola and the strength of the Coca-Cola brand. Unfortunately, CCH's on-the-ground competitive advantage doesn't translate into juicy margins and return on capital. It's as if CCH is a regulated utility with The Coca-Cola Company (KO) as the regulator who takes away most monopoly-generated abnormal returns. KO will always try to give it's bottlers decent returns on capital but will, naturally, try to squeeze out the most profit for itself. The Coca-Cola Company (NYSE:KO) owns 23% of CCH and exerts a lot of influence by virtue of control CCH's license to bottle its products. KO also sells CCH the key syrup ingredient, which makes up ~44% of COGS and so its decisions on pricing syrup has a huge impact on CCH's profitability.

I forecast long-term growth of revenues in the low-mid single digits with slow to negative growth in Established Markets and healthier growth in Developing and Emerging. Overtime CCH will be able to leverage that into at least mid single digit growth in cash flows.

Using a 9% WACC and assuming 4% growth in the near-term I come up with an estimated valuation for CCH's of EUR15.50 per share while using a 15x multiple (slightly below historical average) gets me to a valuation of just over EUR14, so I'm comfortable with a valuation range of EUR14-15 or about $17.50-18.80 per ADR and would recommend buying around EUR12 +/- 0.50 and the volatile stock will give you many opportunities to load up from time to time. Despite having a more conservative growth estimate than consensus, I still come up with a target price of around EUR20 in 2-3 years (~$25 based on current FX) and assumes continued difficulties in its markets. If things turnaround faster than I expect, I wouldn't be surprised to see CCH trading in the upper EUR20s within 2 years time.

I caution, however, that this will not be a smooth ride. The shares are very volatile, it's operations face near-term headwinds, and the market will continue to discount its shares because of its Greek listing until the Greek situation issue is stabilized. The Company has a barely-active London listing that its keeping as a backup and can always re-incorporate somewhere else because most of its operations aren't in Greece, anyway, so "Plan B" is not so bad.

PS. During several periods in the past the ADR has traded at a slight premium to the primary Greek listing, so that's something to keep in mind if you can buy the primary listing in Athens.

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