Description

Company

CCH LN is a $9.8bn USD mkt cap, ~$16m ADV/day European/African Coca Cola bottler that operates in the following regions:

• Established (36% Sales, 34% EBIT): Italy, Greece, Austria, Ireland, Switzerland, Cyprus
• Developing (19% Sales, 19% EBIT): Poland, Hungary, Czech, Baltics, Croatia, Slovakia, Slovenia
• Emerging (45% Sales, 47% EBIT): Russia, Nigeria, Romania, Egypt, Serbia & Montenegro, Ukraine, Bulgaria, Belarus, Bosnia, Armenia, Moldova

*chart above is prior to Egypt acquisition that is included in 2022 results

 Thesis

CCH LN shares off -20% from the peak (Jan 2022) on the back of Putin invading Ukraine (CCH operates in both territories) yet Russia/Ukraine is only ~20% of the business and CCH continues to operate in both countries (actually taking share in Russia as competitors like Pepsi have left the market). Market is assuming 0/negative value for Russia/Ukraine and assuming core biz ex Russia/Ukraine will decrease and/or Putin will invade another CCH territory (Poland/Romania both 8% of sales but are both NATO countries so low likelihood of invasion. The rest of the contiguous territories are 1% or less of CCH sales ie Belarus, Moldova, Latvia, Lithuania). The selling pressure in early 2022 was caused from (1) forced selling of Russia exposed equities by investors after Russia invaded Ukraine, (2) basket shorting of non-Russia traded/listed equities that had large exposure to Russia in order to hedge “Russia” risk when Russia stock market was closed, (3) lack of CCH LN buyback due to current FTSE listing requirements, (4) pulling of 2022 guidance and uncertainty around earnings estimates for 2022/2023e, (5) low liquidity with only ~$15-20m ADV trading per day. Since the invasion, CCH reinstated a lower than original guidance in Aug 2022 and then turned around and beat/raised that guidance in Nov 2022 and issued guidance that was the same as it was at the beginning of the year, prior to Russian invasion (yet stock was still -30% below pre invasion levels leading to a big de-rating at the time) on the back of super strong EU/Africa ex Russia/Ukraine results. While KO parent is exiting Russia (Coca-Cola, Sprite, Fanta brands etc), CCH will launch its own products under the Dorby brand (which means CCH doesn’t need pay the concentrate fee to KO/will actually have higher margins over the MT/LT in Russia; in addition, competitors like Pepsi have left Russia and thus there’s an opportunity to capture market share in Russia over MT/LT given it’s not like the population of Russia has changed much) and in reality Russia could actually be a bigger/better biz than pre invasion levels. In summary, CCH core biz ex Russia results are above pre invasion levels + Russia can actually be a bigger biz today than pre-invasion yet stock is -20% from pre invasion levels. Most importantly, the soft drinks category is one of the most recession resistant categories in all of CPG (flat/-LSD% during GFC/EU debt crisis) as there is very little private label and you are required to drink water/juice/milk/coffee/tea to live so no substitution threat. For 2023, EU dodged/delayed a recession by having a warmer than expect winter and elasticities YTD in 2023 have been much better than expected. CCH will continue to benefit from EU reopening this summer from a volume perspective + pricing will continue to wrap around from 2022/flow thru the P&L leading to above algo OSG for 2023. On margins, costs baskets have flipped from being a headwind to being neutral/soon to be tailwind in 2H23/2024. If CCH can do their 2025 EBIT% target, then there’s material upside to EPS for next couple of years (St ests are ~30% too low) and there’s no reason why they can’t hit this 2025 target imo given productivity plans already in place + raw mats that are now flipping to a tailwind (this was the main headwind in 2022). What’s the catalyst/thesis from here? (1) Core biz ex Russia/Ukraine on fire and another beat/raise coming at 1Q/2023 results, continued rollout of Dorby brand in Russia + soft drinks biz is super resilient in recessions/continued growth in EU + commodities going lower = material upside to St ests after St rebased margins to multi year lows (2) KO/CCH relationship has never been better and KO is incentivized to get CCH’s stock up in order to IPO CCBA (IPO was pulled last year) given CCH is its closest comp – does KO sell them new territories/parts of CCBA instead? This would be done at a decent price to get stock up and would be very accretive (3) will Putin end the war – modest weather in the winter in EU = Putin’s weaponized energy plan not working out as expected, he's running out of resources, (4) since they don't do buybacks (FTSE listing rules) and leverage is below targets, they are at a level where historically they've paid a special dividend. I think this could be ~5-10% of mkt cap and is imminent (5) CCH trading on trough earnings and trough multiples. Stock at 14x p/e vs. 20x p/e pre c19 and 18x p/e pre invasion. Using ~20x p/e and EPS 1.93 (continued strong growth in core, Russia rollout, margin expansion but below 2025 targets, note CCH reports in EUR and trades in GBP) I get +57% upside (GBP 3,431), (6) May 2023 CMD in Italy – I think this will be a positive catalyst where company will speak to 2025 margin targets being reiterated and highlighting the positive parts of their biz right before peak summer selling season.

• Core biz ex Russia/Ukraine on fire:
  • EU reopening beneficiary this summer in tourism markets like Italy/Greece/Switzerland/etc
  • Higher oil prices benefit Nigeria’s economy in the ST (despite impacting CCH margins acting like a natural hedge) as well as low per cap consumptions in Nigeria vs. developed market countries that will drive LT growth
  • Huge price/mix benefit wrap around in 2023
  • Energy, 0 sugar, coffee, alcohol all doing well
  • LT guidance of MSD% OSG and +20-40bps margin expansion still intact
    • OSG driven by demographics in Developing/EM countries
    • 11.3% EBIT margins in 2021 (much lower in 2022 from Russia hit) materially below peer margins of 12.5-13.5% (CCEP 12.7% in 2021)
  • Best in class balance sheet with ~1x net debt/EBITDA
  • Strong management team
• KO/CCH relationship has never been better but why does KO care about CCH?
  • KO owns ~21% of CCH
  • CCH is one of KO’s largest bottlers globally and is material to KO’s biz. Have spoken publicly to how strong CCH is as a bottler
  • KO is trying to IPO CCBA a pan African bottler this year. It was supposed to go public in 2Q22 but is being delayed indefinitely due to “lack of valuation support” as CCH LN is CCBA’s closest peer. Given CCH’s valuation is on trough multiples, it’s going to be difficult to IPO CCBA without getting CCH’s stock up
• So what are KO’s options for getting CCH up so they can IPO CCBA (which has been on KO’s books much longer than expected)?
  • KO/CCH territory swap and/or CCBA takeout by CCH. I think this is the most likely probability. CCH bid for CCBA a few years ago before KO decided to IPO CCBA but CCH is very disciplined on price and couldn’t make the numbers work. Instead of IPO’ing CCBA, what if KO sold all/parts of CCBA and/or sold other non-CCBA territories to CCH to get the stock up? I think selling territories at discount prices to CCH would make the most logical sense. KO benefits from it’s 21% ownership appreciation in CCH as well as getting valuation up to IPO the rest/all of CCBA and/or KO wouldn’t even have to worry about an IPO of CCBA if they sold the entire biz to CCH. A pan Africa bottler run by CCH mgmt. (which are top notch) would actually be a benefit to KO.
  • Maybe KO just waits it out until the war ends and then IPO CCBA (ie do nothing)
• Catalysts?
  • Core biz ex Russia/Ukraine on fire and another beat/raise coming at 1Q/2023 results, continued rollout of Dorby brand in Russia + soft drinks biz is super resilient in recessions/continued growth in EU + commodities going lower = material upside to St ests after St rebased margins to multi year lows
  • KO/CCH relationship has never been better and KO is incentivized to get CCH’s stock up in order to IPO CCBA given CCH is its closest comp – does KO sell them new territories/parts of CCBA instead? This would be done at a decent price to get stock up and would be very accretive
  • Will Putin end the war – modest weather in the winter in EU = Putin’s weaponized energy plan not working out as expected, he's running out of resources
  • Since they don't do buybacks (FTSE listing rules) and leverage is below targets, they are at a level where historically they've paid a special dividend. I think this could be ~5-10% of mkt cap and is imminent
  • CCH trading on trough earnings and trough multiples. Stock at 14x p/e vs. 20x p/e pre c19 and 18x p/e pre invasion. Using ~20x p/e and EPS 1.93 (continued strong growth in core, Russia rollout, margin expansion but below 2025 targets, note CCH reports in EUR and trades in GBP) I get +57% upside (GBP 3,431)
  • May 2023 CMD in Italy – I think this will be a positive catalyst where company will speak to 2025 margin targets being reiterated and highlighting the positive parts of their biz right before peak summer selling season.
• Valuation: trough multiple on trough earnings. Somethings got to give.
  • Bear (£21.38, -2%): take my bear case est for 2023 of 1.80 * 13.5x p/e (trough p/e, this is completely arbitrary) and convert EUR to GBP.
  • Base (£34.31, +57%): take my est for 2023 EPS of 1.93 * 20x p/e (pre pandemic/invasion levels) and convert EUR to GBP. Think guidance for 2023 look super conservative. Will beat on both OSG (pricing will come in better than expected) and margins (commodities rolling in 2H23).
  • Bull (£51.30, +135%): Assume on algo OSG growth and 2025 margin target of ~12.6% = EPS of 2.83 * 20x p/e (pre pandemic/invasion levels) and convert EUR to GBP.
• Risks
  • Cost inflation: was a big headwind and is now flipping to tailwind but and spike in commodities would take 2025 margin tgt off table
  • Russia: the war drags on, Putin sets off a nuke, Russia swings to a big EBIT loss, etc
  • Recession: while not ideal, CCH/KO bottlers actually are very recession resistant and vols didn’t decline much during EU crisis/GFC
  • EM FX Weakness: Egypt, Nigeria more susceptible to EM macro shocks. Any issue here could pressure results
• Other
  • Underfollowed/Undercovered. Most US HFs know about CCEP but not many know about CCH LN. CCH LN has a superior LT algo, better mgmt. team, cheaper valuation and very little debt with corp optionality.

Catalyst

• Catalysts?
  • Core biz ex Russia/Ukraine on fire and another beat/raise coming at 1Q/2023 results, continued rollout of Dorby brand in Russia + soft drinks biz is super resilient in recessions/continued growth in EU + commodities going lower = material upside to St ests after St rebased margins to multi year lows
  • KO/CCH relationship has never been better and KO is incentivized to get CCH’s stock up in order to IPO CCBA given CCH is its closest comp – does KO sell them new territories/parts of CCBA instead? This would be done at a decent price to get stock up and would be very accretive
  • Will Putin end the war – modest weather in the winter in EU = Putin’s weaponized energy plan not working out as expected, he's running out of resources
  • Since they don't do buybacks (FTSE listing rules) and leverage is below targets, they are at a level where historically they've paid a special dividend. I think this could be ~5-10% of mkt cap and is imminent
  • CCH trading on trough earnings and trough multiples. Stock at 14x p/e vs. 20x p/e pre c19 and 18x p/e pre invasion. Using ~20x p/e and EPS 1.93 (continued strong growth in core, Russia rollout, margin expansion but below 2025 targets, note CCH reports in EUR and trades in GBP) I get +57% upside (GBP 3,431)
  • May 2023 CMD in Italy – I think this will be a positive catalyst where company will speak to 2025 margin targets being reiterated and highlighting the positive parts of their biz right before peak summer selling season.