Coca-Cola Hellenic Bottling: Multiple Ways to Win

Kevin Cope of Hutchinson Capital Management presented his in-depth investment thesis on Coca-Cola Hellenic Bottling Company (UK: CCH) at Best Ideas 2020.

Thesis summary:

Coca-Cola Hellenic Bottling Company is the fifth-largest Coca-Cola bottler by revenue. Domiciled in Zug, Switzerland, and trading on the London Stock Exchange, CCH stock trades in GBP, but reports financials in Euros.

In his presentation, Kevin addresses the critical top-of-mind issues he had to get comfortable with before proceeding with this idea; those are sugar-related health concerns and plastic waste. Also, because of the two large shareholders, The Coca-Coal Company (23%), and Kar-Tess Holding (23%), Kevin delved deeply into the company’s corporate governance, which is covered in the presentation. That said, the principal investment drivers include:

Several ways to win: Kevin expects solid TSR from improving ROIC (from both rising NOPAT and lower capital intensity), plus cash distributions from the regular payout, plus probable future special dividends. Even though it’s cheap relative to European staples, Kevin’s base case does not require the stock to rerate. 

Durable competitive advantages: The company’s relationship with Coca-Cola has never been stronger, and with their incentive pricing agreement, the bottler benefits as a brand partner with KO. Contract duration is ten years, with the next renewal in 2023. Because of its size and regional expertise, CCH’s logistics expertise and route-to-market presence make replacement or replication uneconomical (if even possible). Additionally, Coca-Cola owns ~23% of CCH’s equity and has two board seats. Within sparkling beverages, CCH has #1 share in 22 of its 23 markets. This translates into 40% total market share across its footprint. 

Multiple avenues for growth: The company has a large and expanding total addressable market. Its footprint spans 28 countries, housing over 600 million consumers. The company serves three core markets: (1) Developed, (2) Developing, and (3) Emerging. It is the Developing and Emerging (D&E) markets that hold the most interest. With young and growing populations, coupled with improving per capita GDPs, Kevin sees a long runway for growth. Unit economics are compelling: The per capita consumption rates in CCH’s D&E markets are well below those seen in more developed markets. As an example, total company revenue in 2018 was €6.65 billion, but a single incremental serving in just their central and southern European markets would add €4.0 billion in revenue.

Kevin looked at the valuation in several ways and determined that it offers ~40% upside from its recent price of £26 per share. Cash economic value should be driven by continued margin expansion and lower capital intensity as the company finalizes a restructuring plan begun in 2014. The balance sheet is strong, giving CCH optionality to pursue its growth opportunities. There is also a significant catalyst that would strengthen the company’s position in the attractive African market.

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About the instructor:

Kevin Cope received a B.S. degree in Commerce and a B.A. degree in German and from Washington and Lee University in Lexington, VA. Kevin joined Hutchinson Capital Management in September 2015 as a Senior Research Analyst. Prior to joining the firm, he served as a Portfolio Manager and Senior Research Analyst at Cheyne Capital Management, a London-based investment firm. Kevin has more than 20 years of asset management experience working on behalf of both individuals and institutional clients. As CIO, Kevin serves as the Director of Research with the responsibility for overseeing the equity portfolio management process. He is a member of the CFA Institute and the CFA Societies of San Francisco and New York. Kevin lives in Marin County with his wife and three children.