BMI: Coca-Cola Hellenic Trading At Discount But Can Close Valuation Gap With Strategic Acquisitions

The world's second largest Coke bottler Coca-Cola Hellenic (CCH) has reported an increase in revenues and profits for 2010. For the 12 months to the end of December, CCH's revenues increased by 4% to EUR6.79bn, while volumes inched up by 1%. Net profits for the year came in 8% higher on a comparable basis, while operating profits grew by 5%.

The stagnation in the firm's volumes reflects the continued difficulties in some key markets, but the increase in earnings point to the success that the firm has had in stripping out costs as it deals with the challenges imposed by the economic backdrop. The firm's fortunes remain partly tied to the performance of some economies hit hardest by the global economic downturn, including Greece, Ireland and the Baltics. However, the firm is also well positioned in some highly attractive markets and remains in a strong position to expand through both organic growth and acquisitions.

CCH holds the franchise to bottle Coca-Cola products in most of Eastern Europe and parts of Western Europe. Up until 2008, CCH's large exposure to Eastern Europe was regarded as a major asset. However, this region was particularly affected by the economic downturn and a drop in volumes and earnings translated into a sharp fall in CCH's share price (see first chart). However, over the last two years CCH's shares have regained much of their lost value, thanks to the recognition that the firm remains well-exposed to some very promising long-term growth opportunities across the Eastern European region.

During 2009, CCH's volumes in what it classifies as developing markets (including Croatia and the Czech Republic) declined by 5%, while volumes in its emerging markets (including Russia and the Ukraine) declined by 8%. Comparable volumes in 'established markets' declined by 1%. However, during 2010 there has been evidence of a significant recovery with CCH's volumes in developing markets climbing by 1% during the year and by 8% in the fourth quarter (driven by growth in the Czech Republic, Hungary and Poland). Volumes in its emerging markets increased by 6% during the year and 9% in the fourth quarter, driven by growth in Russia, Ukraine and Nigeria. The one weak point was the firm's performance in more mature countries, with comparable volumes in 'established markets' declining by 3% on the back of continued tough trading in Greece and Ireland.

CCH's exposure to some very difficult markets continued to drag on the company's performance in 2010 and explains why the firm trades at a discount to the other large Coca-Cola bottlers (with the exception of Coca-Cola Enterprises, which has very little exposure to emerging markets - see second chart). While there is no magic bullet for the problems of countries such as Greece and Ireland, markets which can be expected to remain difficult for at least a couple more years, the firm's accelerating growth in key emerging markets should increasingly act to offset this issue, particularly if combined with acquisitions.

In mid-2010, CCH said that it is on the lookout for takeovers as it seeks to expand its international market share. However, the firm has since been quiet in this regard. Its stable performance during 2010 would suggest that it may now be in a position to consider making significant investments to best position itself for long-term growth. If it makes the right choices, with investment in the most promising markets of Eastern Europe and Africa the most likely route for growth, we believe there is a strong chance that it could close the current valuation gap.

BMI: Germany Food and Drink Report Q4 2010:
http://www.reports-research.com/market-surveys/germany-food-drink-report-2010-p-123816.html

BMI: United Kingdom Food and Drink Report Q3 2010:
http://www.reports-research.com/market-surveys/united-kingdom-food-drink-report-2010-p-108918.html

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