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Coca-Cola/EUROBANK – Healthy outlook intact but largely priced in

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Healthy outlook intact but largely priced in Still on track but pressure on delivery in H2 – Operating momentum ebbed in Q2, with organic revenue growth decelerating to 2.3% (from 4.7% in Q1) mainly owing to weaker weather trends and tougher comps. The 4.7% adj. EBIT growth delivered in H1 translated to a 10bps margin expansion, and although this was in line with consensus, it puts pressure on delivery in H2 for CCH to meet its target of at least 40bps expansion in FY19.

With weather comps getting easier and innovation gathering pace, we concur with mgt’s view that the accretion is feasible and on track, but we caveat this hinges to an extent on the macro backdrop not deteriorating. Our numbers do not change materially and call for c12% EBIT growth in FY19e (implying +18% in H2). Our forecasts are c1% above consensus.

Medium-term: high-single digit profit growth implicit in CCH’s guidance is already embedded in estimates – CCHBC has delivered a 90 bps average EBIT margin expansion over 2015-2018, with a further 40bps anticipated on average in 2019- 2020e. In the remaining period through to 2025 mgt has guided for acceleration of organic revenue growth but for more moderate margin expansion (20-40bps annually) owing to more limited room for cost savings and spending on innovation.

We estimate this translates to high single-digit annual EBIT CAGR over 2018-2025e, which is already embedded in both our and market estimates. By implication, we see relatively limited upside risk to medium-term forecasts unless the macro/FX backdrop proves more constructive and conducive for CCH’s fundamentals.

Share price to move in tandem with fundamentals – 2019 marked the year of re-leveraging for CCH (€730m special dividend, acquisition of Bambi). Although mgt has stressed that the special dividend should not be seen as ruling out transformational M&A given the strength of the balance sheet and that more bolt- on acquisitions are in the pipeline, we believe that the M&A trade is poised to fizzle and that the scenario of a transformational corporate action will feature less prominently on investors’ agenda. On that basis, we expect the stock to trade more based on fundamentals rather than on balance sheet redeployment expectations.

Valuation – We incorporate in our valuation the sustained low interest rate environment in the light of further central bank easing. We have also recalibrated our methodology reverting back to a pure DCF, as the re-leveraging theme has played out. The impact from the incorporation of the special dividend in our PT is more than offset by the positive effect from the use of a lower WACC (7.9%). As a result, our PT is raised to €30.1, effectively valuing CCH at a 1-year forward PE of c20x, small discount vs. EU beverages.

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