Coca-Cola HBC Q323 Preview: Improving volumes in Emerging Markets to help offset unfavourable European weather

We update the model for Coca-Cola Hellenic (CCH) ahead of Q323 results scheduled for 31October. We forecast +14.5% organic sales in Q3 (volume +1.6%, price/mix +12.7%) with a volume decline in Established, weighed by tough comps and unfavourable weather, as well as in Developing (although underlying consumer trends should remain in line with H1 in most markets), while we forecast improving volume trends in Emerging on softer comps and strong execution of RGM initiatives. We slightly raise the forecasts for FY23E organic sales to +15.5% (vs +15.0% prior) and model comparable EBIT of €1,026m on +11.5% organic EBIT growth (guidance +9-12%), which drives a small +0.3% increase to the FY23E adj. EPS forecast for €1.90.

While we acknowledge the ongoing strong price/mix performance, we have concerns on the volume weakness in European markets and note limited visibility on volatile macro-economic conditions in Emerging Markets. These headwinds could persist into 2024, and while valuation appears attractive, CCH still has significant exposure to Russia (c.20% of EBIT) where investors are unlikely to place much value on those earnings given the difficulty in withdrawing cash from the market. On the forecasts, CCH trades at 12.0x 2024 P/E, a c.20% discount to European Beverages at 15.6x. We lower the Dec-24 price target to 2,400p (vs 2,600p prior) on an increased WACC (14.5% vs 13.7%) due to an increased risk free rate and equity risk premium (higher EM volatility).

Q323 preview: For Q3, we model +1.6% organic volume (+3.6% incl. M&A) to 785m UC with tough comps, unfavourable weather and ongoing Water headwinds in Italy driving -6.3% in Established. In Developing (JPMe -5.1%) we expect ongoing resilience in Poland to be offset by continued consumer pressures in Hungary and Czechia, while we expect improved trends in Emerging on softer comps and solid execution, and therefore we forecast +7.4% organic volume (including Russia +35%, Egypt +16%, Nigeria +3%, and Romania -15%). Favorable product mix (Water under pressure) and strong pricing drive JPMe +12.7% organic price/mix and +14.5% organic sales growth (Established +9.6%, Developing +13.8%, Emerging +20.3%). For FY23 overall we model +15.5% organic sales growth (guidance mid-teens) to €10,164m, and comparable EBIT of €1,026m on +11.5% organic growth (guidance +9-12%).

Investment Thesis: While we acknowledge the strong price/mix performance, we have concerns on volume trends and note limited visibility on tough macro-economic conditions in Emerging Markets and consumer weakness in Developing Markets. These headwinds could persist into 2024, and while valuation appears attractive, CCH still has significant exposure to Russia (c20% of EBIT) where investors are unlikely to place much value on those earnings given the difficulty to withdraw cash from the market. We still believe in the LT execution strengths of the business and the strong portfolio across Sparkling, Energy and increasingly interesting adjacencies (eg Coffee). However, given the still active risks, substantial inflation, and uncertainty on consumer demand across most of its markets, we believe risk/ reward if fairly balanced for now.

Valuation: The DCF-derived Dec-24 price target of 2,400p uses a 14.5% WACC and 3.0% LT growth rate, with a WACC well above the rest of the coverage driven primarily by its Russia-exposed cash flows which require an elevated equity risk premium.