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Questor: Coca-Cola Hellenic looks like the real thing for investors but the shares aren’t cheap. Hold
Questor share tip: the Coke bottling company is growing nicely and has valuable exposure to emerging markets
Zoran Bogdanovic claims that one of his personal highlights of 2018 was enjoying a Coke Zero while watching his native Croatian football team in the World Cup final in Moscow.
Even if he didn’t get the result he wanted – the Blazers went down in flames 4‑2 at the hands of France – at least the chief executive of one of Coca-Cola’s largest bottling companies could toast a successful tournament that drove volumes 4.4pc higher in Russia, its largest market.
The bottling arrangements of the world’s most famous soft drink are a curiosity. Originally dispensed from soda fountains, Coke sold its first bottling rights in 1899 to entrepreneurs who thought they could make a buck from the new thirst quencher. The company gradually internationalised and over the years many of these family-run enterprises consolidated.
Today Coke works with some 300 bottling companies. It owns the brand and runs the marketing but sells them special syrup to make the drink. The bottlers are in the lucrative business of manufacturing, packaging and distribution.
Bogdanovic runs the Coca-Cola Hellenic Bottling Company (CCH), which has Greek roots but sells Coke in 28 nations from the Arctic Circle to Nigeria, including several in Europe – although not Britain. However, its main listing has been in London since 2013, when it also moved its head office to Switzerland.
It floated here in an attempt to correct a “Greek discount” that companies were suffering because of the country’s debt woes. Six years on, the irony is that stock market analysts think Brexit uncertainty is hitting some of the blue-chip FTSE firms with little more than an office base here.
A strong share price run betrays no suggestion that CCH is one of those afflicted. The attraction for investors has been its exposure to emerging markets. A rule of thumb is that as GDP per capita increases, people drink more Coke, although that doesn’t quite square with the fact that Mexicans consume more than anyone.
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It is also worth pointing out that CCH is not just about the fizzy stuff any more because almost a third of sales come from still drinks including water and juices.
For two years in a row, revenue growth has been above the group’s 4pc-5pc target range if currency swings are stripped out. At 6pc, it’s a top-line performance that other consumer goods firms such as Reckitt Benckiser or Unilever can only dream of.
The star performer was its developing markets division, which recorded 11.9pc underlying sales growth thanks in part to price rises in Hungary and Poland and soaring sales of energy drinks. CCH’s established markets arm, including Ireland and Italy, grew at 2.1pc, while its largest division, emerging markets, put on 6.8pc thanks to strong volume growth everywhere bar Nigeria.
It puts the company – 46pc of which is owned fairly equally by the Greek David-Leventis family and Coke itself – well on the way to achieving its 2020 financial targets. Of these, an operating margin of 11pc is the most eye-catching. Investors are betting the expansion can go further, with analysts at UBS forecasting growth from margins of 10.2pc to 11.9pc over the next five years.
Under Bogdanovic there have been some deals at the fringes. CCH has bought local bottled water brands and in February went really off piste when it acquired top Serbian biscuit brand Plazma. But this activity, other than perhaps boosting the group’s distribution network, is a sideshow given that only 3pc of volumes come from non-Coke brands.
What has got City mouths watering is the prospect of a bigger takeover. CCH is being talked of as a buyer for Coke’s southern African bottler.
Despite a special dividend worth €730m (£629m) announced earlier this month, analysts at Exane BNP Paribas, the bank, say the management is “crystal clear” that deals are not off the table even if that means temporarily going beyond a net debt ceiling of twice earnings. Meanwhile, first-quarter underlying sales growth was a reassuring 4.7pc, with an acceleration expected.
Trading at 22 times this year’s forecast earnings, this is not the ideal entry point, but the stock has built a proven track record after a mixed performance when it first came to London. Worth holding.
Questor says: hold
Ticker: CCH
Share price at close: £27.32
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