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13 July 2014

Coca-Cola HBC AG Summary company financials (m)


Pre-credit crisis
Price 13.51 Year end December FY2007A [] FY2012A FY2013A FY2014E
Market cap (m) 4,937.7 Revenue 6,461.9 7,044.7 6,874.0 6,720.3
Enterprise value (m) 6,459.9 15.1% 3.2% -2.4% -2.2%
41.1% 35.8% 35.4% 36.2%
Free float 54% EBITDA 1,060.8 822.7 786.0 818.1
16.4% 11.7% 11.4% 12.2%
EBIT 703.4 444.4 429.2 450.3
10.9% 6.3% 6.2% 6.7%
Margins and EV/Sales, Coca Cola HBC vs Coca Cola bottler comps: Net income 472.3 193.4 221.2 290.8
Gross margin EBIT margin EV/Sales Net debt (cash) 1,699.0 1,777.1 1,562.3 1,522.2
Coca-Cola HBC AG 35.4% 6.2% 0.96 Shares outstanding 364.6 364.5 365.2 365.5
Arca Continental 48.1% 17.0% 2.43
Coca-Cola Amatil Limited 43.8% 16.4% 1.76 EV/Sales 1.00 0.94 0.96
Coca-Cola Embonor 37.4% 13.4% 1.33 EV/EBITDA 6.1 8.2 7.9
Coca-Cola Enterprises 34.9% 13.0% 1.85 PE 10.5 22.3 17.0
Coca-Cola FEMSA 46.7% 14.2% 1.88
Coca-Cola Icecek 37.4% 11.6% 2.40 ROE (ex g/w) 41% 18% 21% 24%
Average margin of comps 41.4% 14.3% 1.94 ROIC (ex g/w) 19% 12% 12% 15%
Revenue growth
EBITDA margin
EBIT margin
Gross margin
Stated 2007, 2013 & 2014 valuation metrics are assuming current market capitalisation:
We believe that this business can deliver higher margins, and we are committed to grow them back to the pre-crisis levels. The timing
depends to a large extent on the external environment. Becoming a leaner and more efficient organisation is a key priority for us.
Coca Cola HBC's CFO, Michalis Imellos, 31 May 2013, Capital Markets Day.

"The Group has decided to replace group return on invested capital (ROIC) with Group EBIT margin as the multiplier of the [management
long term incentive] plan. We expect this change to further enable our management to align better performance with CCHBCs long-term
objectives for EBIT growth."
Coca Cola HBC 2013 Annual Report.

Coca Cola HBC "CCHBC" is the second largest bottler of Coca Cola beverages in the world and operates in 28 countries the core regions being
periphery Europe (68% of revenues), Russia (22%) and Nigeria (10%) . In total CCHBC sells to an aggregate population of 585m that is
growing at c.1% pa. In 23 of the 24 markets where the group operates, it ranks No.1 for sparkling beverages the sole exception being
Slovakia. In 2013, CCHBC gained or maintained volume and value share in 20 out these 24 markets.

CCHBC operates 68 plants, 312 filling lines and maintains 252 distribution centers and 72 warehouses throughout its regions. The products
that the CCHBC Group produces, sells and distributes include Sparkling beverages and Still and Water beverages. The combined Still and
Water beverages category includes juices, waters, sports and energy drinks and other ready-to-drink beverages such as teas and coffees. In
the year ended 31 December 2013, the Sparkling beverages category accounted for 70% and the combined Still and Water beverages
category accounted for 30% of the CCHBC sales volume.

Kar-Tess Holding currently owns approximately 23.2% and The Coca Cola Company currently owns approximately 23.1% of CCHBCs
outstanding share capital. In April 2013 CCHBC's domicile was transferred from Athens to Zug and the primary listing moved to the London
Stock Exchange from the Athens Stock Exchange. FTSE-100 entry was secured in September 2013 but the free float is only 54%.

The business of bottling and distributing for The Coca Cola Company appears to remain a robust one globally with the Coca Cola bottlers (ex
CCHBC) expected by consensus analysts to achieve an average 4.9% revenue growth in the current year and a 14.3% average EBIT margin. As
a group, Coca Cola bottlers (ex CCHBC) are valued by the market at an average rating of 1.9x EV/Sales. Only two countries in the world now
lack Coca-Cola bottlers, namely Cuba and North Korea.

Currently, CCHBC 's equity price is testing 2 year lows. The stock's EV/Sales rating of 0.96x is a 51% EV discount to Coca Cola bottler comps
and a 64% equity discount to the comps. The pessimism surrounding the company's value is likely to be related to two main factors. Firstly,
CCHBC's revenue growth has been lacklustre. CCHBC derived 10% of its revenues from Greece in 2008 and its Greek revenues have declined
more than Greek GDP contraction - down 45% to 6% of CCHBC's revenue in 2013. CCHBC derives the majority of its revenue from other
perhipery European regions which have also had a higher than average impact from the economic crisis including Ireland, Cyprus, Poland,
Hungary, Czech, Croatia, Slovakia, Romania, Serbia, Belarus, The Baltics, Ukraine and Bulgaria. As a result, CCHBC's revenue for FY2013 at
6.87bn has seen no increase since FY2008 revenue of 6.98bn, and this is despite more than 600m of acquisition spend in the period.

Secondly, CCHBC's gross margins at 35.4% and EBIT margins at 6.2% are the lowest of the peer group of Coca Cola bottlers which achieve an
average gross margin of 41.4% and EBIT margin of 14.3%. Therefore, although CCHBC looks inexpensive against peers when measured based
on EV/Sales, when measured on PE rating it trades on a reasonably full 17.0x for FY2014E.

If we look back to 2007, CCHBC achieved a 41.1% gross margin and a 10.9% EBIT margin. Therefore, there appears not to be a fundamental
reason why CCHBC should not aim again for margins closer to the level of its peer group. Supporting this thesis, it appears not to be an an
inflation of CCHBC's controllable costs that appear to be the core problem; CCHBC's operating costs, ex cost of goods sold, have declined
from 30.2% of revenue in 2007 to 29.2% of revenue in 2013. More specifically, the cause of the margin decline appears primarily to be an
inability or unwillingness by CCHBC to pass on raw material costs - both concentrate and other raw materials - to its customer base in a
period of economic weakness. CCHBC discloses the fees charged by The Coca Cola Company for concentrate, which have risen from 18.7% to
inability or unwillingness by CCHBC to pass on raw material costs - both concentrate and other raw materials - to its customer base in a
period of economic weakness. CCHBC discloses the fees charged by The Coca Cola Company for concentrate, which have risen from 18.7% to
20.5% of revenue 2007-2013. Other raw material costs have also risen, from 40.2% to 44.0% of revenue 2007-2013. CCHBC, it appears, has
elected to maintain volumes at lower margin rather than preserve margins but lose volume and market share.

A rewarding investment in CCHBC will therefore rest primarily on two factors: 1) a recovery in revenues and 2) an improvement in EBIT
margins to closer to the level of the Coca Cola bottler comps.

There are some early signs of improvement in CCHBC's revenues as the European economy improves. Group volumes increased 1% in Q4
2013, and although Q1 2014 saw a 4% volume decline, this was against a Q1 2013 comp which included the Easter period whereas Q1 2014
did not. Generally speaking, CCHBC is holding or gaining market share, so no specific reason exists to assume further volume declines unless
the economies that the company supplies continue to contract. Management have guided, that on a currency neutral basis, CCHBC has now
grown revenues per case for the last 11 consecutive quarters.

Investors may also be underestimating the potential for CCHBC revenues to grow. Typically, soft drinks consumption is correlated to GDP per
capita and CCHBC management note that GDP per capita in the countries they supply is just half the European average, as is soft drinks
consumption per capita in these countries compared to the European average. Management therefore guide significant opportunities to
promote increased consumption of soft drink beverages. Additionally, Nigeria comprised 9.8% of CCHBC volume in 2013, and growth here at
11.3% was well ahead of the 6.5% GDP growth. Whilst there are obvious challenges in operating in a region such as Nigeria (poor
infrastructure, political issues, economic reliance on oil), the potential is attractive both in terms of economic and population growth.

The potential for margin improvement, as noted, may be primarily linked to stronger economic growth giving CCHBC the confidence to raise
pricing to begin to offset raw material price rises. In terms of actions that management can take - an increased sales and marketing push
with big accounts would enhance revenue growth, giving a cushion for some revenue attrition should pricing increases slow sales in certain
regions. Additionally, CCHBC may be able to continue to reduce its controllable costs, but assuming a continuation in the average rate of
reduction of c. 0.15% of sales per annum since 2007, the EBIT margin impact will be limited from this variable alone.

There is little publically available data to allow investors to take a strong view with regard to margin improvement at CCHBC, particularly
given so far, CCHBC has disappointed in this regard. Contrast the situation here to the margin improvement drive at Mondelez, where
margin targets have been given, whereas at CCHBC none have other than a non specific target of "pre-crisis" margin levels mentioned. At
Mondelez, the CEO is on the record to the FT with regard to the appointment of Accenture - who partnered 3G in their margin improvement
drive at Heinz and AB InBev - stating they can be of great help to Mondelez. CCHBC by contrast have made no public comments regarding
appointing outside experts to assist them in the margin improvement process.

In summary CCHBC is Europe's largest bottler for The Coca Cola Company, and on an EV/Sales basis trades at a 51% EV discount to Coca Cola
bottler comps and a 64% equity discount to the comps. CCHBC's gross margins and EBIT margins, however, are significantly below the comp
set, and as such would need to see improvement before a higher valuation for CCHBC can be warranted. Some economic recovery in the
perhipery regions of Europe as well as potential growth from Nigeria may help CCHBC's top line as well as giving the company the confidence
to raise prices and therefore margins, however, it is difficult to put forward confident forecasts whilst the company itself does not
communicate its own targets. Despite this, the upside / downside dynamic of an investment in CCHBC at current levels may be seen as
attractive. At 0.96x EV/Sales the company is already at a 51% EV/Sales discount to comps, and assuming a recovery in EBIT margins to the
10.9% CCHBC achieved in 2007, the company would trade at 9.8x PE. Assuming margins can go higher than this - to the 14.3% average EBIT
margin achieved by the comps - the PE rating drops to 7.3x. Passive minority investors may want to press management further for more
specific guidance as to what margin targets are realisable and for more specific guidance relating to timeframe. Activist investors may
alternatively see an opportunity here for an accelerated margin improvement approach.