Introduction
Coca-Cola Company is a global corporation known worldwide for its diversified brand portfolio. The company mainly manufactures a variety of non-alcoholic soft drinks in different parts of the world. Soft drinks are usually non-alcoholic carbonated beverages that contain edible acids, a sugary agent as well as synthetic or natural flavors. Some of the common types of soft drinks include: flavored water, colas, iced water, sparkling water, sweet tea fruit punch and squash. Most of the Coca-Coal products bear regional names.
For example, typical names include: soda, coke, pop, tonic, bubbly water, fizzy drinks, cold drinks and circus water. In several parts of the United States, carbonated soft beverages are normally referred to as pop soda, coke, tonic or cola. In Australia, South Africa and Canada, they are known as soft drinks or fizzy drinks (Kumari, Bhat & Pandey, 2010, p.441).
Coca-Cola Hellenic
Company Profile
According to Lim and O’Cass (2001), Coca-Cola Hellenic is the second biggest bottler for the Coca-Cola Company in terms of volumes (p.58). The company boasts of a robust product diversification and its earning base is well across Europe, Nigeria and Russia. Coca-Cola Hellenic Bottling Company manufactures and distributes an assortment of non-alcoholic merchandizes with a robust and diversified portfolio. For example, during the financial year 2010, the company produced over 2 billion unit cases and earn about EUR 6.7 billion in revenues. Over the past years, the company has steadily diversified its portfolio of merchandizes to include water brands and juices as well as the famous Coca-Cola products such as Coca-Cola Zero, Fanta, Coca-Cola and Sprite (Lim & O’Cass, 2001, p.58).
Rating Rationale
According to Moody’s Investors Services (2011), the rating rationale of Coca-Cola Hellenic is a clear manifestation of its status as the biggest Coca-Cola bottler in terms of revenues and sales. The company operates in over 25 markets, including Nigeria. It is important to note that although The Coca-Cola Company (TCCC) holds a 22% stake in the bottling company, the two companies share a long history of partnership from an operational and strategic viewpoint including joint acquisitions.
The Coca-Cola Hellenic’s A3 rating reflects its excellent geographic diversification that is geared toward introducing its brand portfolio in new markets. According to Kumari, Bhat and Pandey, the bottling firm manufactures and distributes a variety of sparkling non-alcoholic drinks (2010, p.442). In the FY 2010, these beverages represented over 65% of the company’s total volumes (Moody’s Investors Services, 2011, p.2).
International Operations
According to Kumari, Bhat and Pandey, Coca-Cola Hellenic’s network is spread over 25 countries in Eastern Europe, Western Europe and Nigeria (2011, p.442). Continuous investments in Coca-Cola Hellenic’s immediate consumption infrastructure have enabled the company to establish formidable barriers to market entry as well as reinforce its position across its franchise.
Nevertheless, Moody’ warns that the bottling company amplified its presence in emerging and developing markets (such as Nigeria). When put together, this represents 57% of aggregate sales and about 58% of aggregate operating profit in FY2010. It is worthy to note that the low per capita consumption of non-alcoholic products in the emerging and developing markets (such as Nigeria) provides considerable sales and revenue growth prospects for Coca-Cola Hellenic.
Nonetheless, the company’s operations in these emerging markets might face some instability (such as currency instability as witnessed in 2009) in terms of profits as the share of earnings generated grows. In spite of the volatility in these emerging markets, it is worthy to note that Romania, Russia and Nigeria accounted for about 30% of the company’s volumes in FY2010 (Moody’s Investors Services, 2011, p.3).
Although the sovereign debt crisis in Greece generate additional constraints on the Coca-cola Hellenic’s cash flows and profitability, the company’s rating remains unchanged for now.
This is attributed to a number of factors such as: the reticent contribution to profits from Greece and the company’s geographic diversification; the introduction of lower corporation tax rate and a simplified tax regime adopted by the Greece government in March 2011 as part of the strategies to boost competitiveness of Greece companies; Coca-cola Hellenic’s sustained access to the debt instrument markets; and the low financial and operational reliance on the Greece’s banking institutions by the bottling company.
It is important to note that the Coca-Cola Hellenic Company has for some time been using Coca-Cola HBC Finance B.V. (a wholly-owned subsidiary) to issue its debt instruments. According to Moody’s Investors Services, Coca-Cola HBC Finance B.V. (located in Netherlands) centralizes the cash produced by all subsidiaries owned by Coca-Cola Hellenic, with minimal cash reserves in Greece (2011, p.3).
Cash Flow Generation
According to Moody’s Investors Services, the cash flow generation of Coca-cola Hellenic is currently hampered by miserable consumer environment which resulted to pressures on distribution channels and sales volumes (2011, p.4). Moreover, the company’s profit margins declined since the onset of FY2011 from a momentous increase in its cost of inputs, mainly attributed to rising cost of juice, sugar and fuel.
The company’s EBITA margin was in the region of 9.2% in the past 12 months, compared with 10.5% in FY2010 and 10.2% in FY2009. On a positive note, the increase in the cost of inputs is projected to be recovered via price increases in the remainder of 2011 although these will mainly be selective since the consumer environment is still hostile to pricing activity.
The company’s profitability is also expected to gain from the streamlining measures adopted by the firm. These measures are projected to generate profits of about EUR 37 million in FY2011. Apart from these restructuring measures, Coca-Cola Hellenic has raised it focus on cash as well as lower growth investments and a consolidated working capital management.
Consequently, the capex is projected to amount to EUR 1.4 billion between FY2011 and FY2013. In general, the bottling company is dedicated to produce about EUR 1.5 billion in free cash flow in the next three years. During the first and second quarter of FY2011, free cash flow was estimated at EUR 116 million. This amount is projected to increase remarkably in the subsequent quarter given the seasonality of the company’s business operations (Moody’s Investors Services, 2011, p.4).
Credit Metrics and Financial Policy
In general the financial policy of Coca-Cola Hellenic has been discreet for a number of years as manifested by its dedication to sustain a gearing ratio of between 34% and 46% in FY2010. According to Moody’s Investors Services, the dividend policy of the company has also been generally steady up to the moment when the company decided not to dispense dividends due to tax reasons (2011, p.4). Instead, it returned about 180 million Euros as capital return to its investors.
A capital return of about 548 million Euros had been fulfilled by November 2009. Moreover, the Coca-Cola Hellenic Group has not made any acquisitions since Socib in Italy. The company’s present outlook and rating are based on the prospects that the bottling firm will adopt a discreet strategy to debt-financed acquisitions and rewarding investors and that it will sustain its credit metrics at their present level (Moody’s Investors Services, 2011, p.4).
Basically, the liquidity profile of Coca-Cola Hellenic is excellent. The company generates strong and somewhat steady cash flow from its business operations albeit its dependence on the second and third quarters. The company’s operating cash flows are usually dispensed to both capex investments and shareholders even though the former have been trimmed down in the last two financial years. This is reflected by reduced investments in a number of distribution channels given the general declined in demand for non-alcoholic products.
The liquidity profile of the Coca-Cola Hellenic is further boosted by its constant access to the commercial paper (via its 1.0 billion Euros worldwide program) with climax outstandings of between 200 million Euros and EUR 400 million euros that naturally correspond to the company’s working capital needs during the summer season.
In addition, the company has successfully issued a long-term bond of 300 million Euros to pre-finance 301 million euros of notes that expires in July 2011. It is worthy to note that Coca-Cola Hellenic does not have short-term refinancing requirements given that the next noteworthy bond reimbursement is three years away (Moody’s Investors Services, 2011, p.4).
The Rating Outlook
According to Moody’s Investors Services, the steady rating outlook mirrors the somewhat predictable profits produced by the Coca-Cola Hellenic’s wide range of non-alcoholic drinks (2011, p.4). It also reflects the prospect for revenue and volume growth in the company’s emerging and developing markets such as Nigeria.
The steady outlook also takes into account a low probability of any unpleasant adjustment in the legal and operating environment in Greece and the continuance of a discreet financial policy with controlled debt-financed acquisition endeavors in the short-term and medium-term (Moody’s Investors Services, 2011, p.5).
Factors that could raise Coca-Cola Hellenic’s Rating
A rating upgrade is not feasible in the short-term period given the unstable environment in Greece. A long-term positive rating is nonetheless possible if there is a persistent improvement in the operating performance of Coca-Cola Hellenic across its traditional, emerging and developing markets resulting to superior debt protection measurements (Moody’s Investors Services, 2011, p.5).
Factors that could reduce Coca-Cola Hellenic’s Rating
There are several factors that could adversely affect the Coca-Cola Hellenic’s rating. These include: implementation of government policies to stabilize public finances in Greece; an adjustment in the current relationship between The Coca-Cola Company and the Coca-Cola Hellenic Company; A downgrade of the Coca-Cola Company’s long-term rating; stiff competition in Coca-Cola Hellenic’s traditional markets; notable acquisitions through debt-financing; poor standards of cash flow management; and decline in operating performance resulting to poor credit metrics (Moody’s Investors Services, 2011, p.5).
Nigerian Bottling Company
Company Profile
According toECL Asset Management Limited, Nigerian Bottling Company (NBC) was established as a subsidiary of the A.G. Leventis Group in 1951 and sells Coca-Cola merchandises in Nigeria (2008, p.1). Currently, NBC Plc is a subsidiary of Coca-Cola Hellenic Company, one of the largest bottling firms owned by the Coca-Cola Company.
Coca-Cola Hellenic Company runs its operations in over 26 countries and serves about 530 million consumers. It distributes close to 1.2 billion unit cases of non-alcoholic drinks every year. NBC, started as a family business, has expanded its operations to become a major bottler of non-alcoholic drinks in the country (Chen, 2001, p.127).
The company manufactures and distributes over 30 different brands of Coca-Cola. Some of the popular non-alcoholic drinks produced by NBC include Burn energy drink, Eva Water and Five Alive fruit juice. Currently, NBC boasts of over 12 bottling facilities and has about 78 distribution storehouses located across Nigeria.
Ever since NBC Plc started production, the company has remained the major bottler of non-alcoholic drinks in Nigeria in terms of sales volumes. The bottling company sells over 1.7 billion bottles every year thus making Nigeria the second biggest market in Africa. Recently, the company launched a restructuring program to increase its share of market and boost profit margins.
For example, NBC invested in the new high-tech packing line and can-filling at the Apapa facility. Since then, the facility has started to produce non-alcoholic beverages that can be completely packaged in Nigeria. This comes in the wake of a new bottling facility located in Abuja as well as massive investments to improve production infrastructure, distribution and delivery plants (ECL Asset Management Limited, 2008, p.1).
Financial Structure
The certified share capital of NBC Plc is N750 million consisting of 1.4 billon ordinary shares of 50,000 for every share. The company issues and pays N654, 366 for every 1.307 ordinary shares of 50,000. The company’s share capital rose from N486 million in 2003 to the current amount as a result of a number of script issues. Foreign investors are the major shareholders.
They include Coca-Cola Hellenic Bottling Company (10.6%) and Molino Sot Drinks S.A (55.8%). Consequently, a mere 33.6% is held by the public. It is worthy to note that in the investors fund rose from N19.3 billion in 2003 to about N22.8 billion in 2007. This increment reflected a 4% compound annual growth rate. Following a very considerable decline in 2006, aggregate assets of NBC Plc rose from N14.9 billion to about N47.9 billion in 2007.
At the end of FY2007, the contribution of equity to aggregate assets was estimated at 47.3% reflecting a decrease from 130% in FY2006. The decline in aggregate assets in FY2006 could be attributed to the company’s restructuring program that took place in that year. The restructuring exercise has also adversely affected the leverage level given that debt/equity ratio decreased from about 70.4% during the FY2006 to about 41.6% in the FY2007 (ECL Asset Management Limited, 2008, p.2).
Efficiency Factors
It is important to note that the employee cost/turnover ratio remained constant at 11.1% in spite of the fact that the aggregate number of employees decreased from about 6, 142 in FY2006 to 6140 in FY2007. In spite of this phenomenon, efficiency per employee improved remarkably demonstrating a more productive use of human labor.
Nonetheless, the major problem facing NBC Plc is the persistent rise in the cost of production. In FY2006, for every N1 of turnover, 0.7K went to cost of sales. However, some marginal gains were made as this decreased to 0.69K in FY2007. Asset turnover increased marginally in FY2006 from 1.34× to 1.49× in FY2007. In addition, return on Assets (ROA) increased considerably from 0.39% in FY2006 to 9.11% in FY2007 (ECL Asset Management Limited, 2008, p.3).
Profitability
The company’s turnover rose from N59 billion in FY2006 to N68 billion in FY2007 representing a 14% increase. This reflects a minor decrease in the growth rate when compared to the growth rate of 16% realized in FY2005. NBC Plc realized a 12% turnover in compound annual growth rate in the last five years. The company’s history of declining earnings could be attributed to the huge amount of amount money spent on debt and interest repayment.
However, NBC Plc seems set on profitability path given the cutback in the debt aspect. The company’s recovery path is clearly demonstrated by the rising rate of interest cover and improving margin (29.6% in FY2006 against 30.96% in FY2007). According to the result of the first quarter of FY2008, the company’s turnover is projected to increase at 17.9%. At the same time, profit after tax is also projected to increase by 44.9%.
Return on Equity (ROE) is placed at 20% compared to 22% in FY2006. In addition, earning per share (EPS) estimated at 92K in the first quarter, is estimated to exceed the 242K which is the previous year’s level. In 2003, the company’s profit before tax was about N6.03 billion. Nonetheless, earnings declined considerably to about N1.89 billion in FY2006 but later rose to N4.29 billion in FY2007 representing a 124% increase.
It is worthy to note that NBC Plc needs to increase its revenue base as well as pursue dynamic cost reduction approach in order to bolster its profit margins in the next financial period. This is necessitated by the fact that the company’s compound annual rate of growth for profits over a five year period is currently at less than 1% (ECL Asset Management Limited, 2008, p.3).
Technical Analysis
CL Asset Management Limited estimates that, in FY2003, NBC’s current liquidity ratio was 1.25:1 (2008, p.4). Later on, it decreased in FY2004 to 1.01:1 and hit a low of 0.66:1 in FY2006. Nonetheless, the liquidity ratio increased marginally in FY2007 to 0.81:1. This implies that, in spite of the fact that NBC Plc was able to fulfill the liquidity requirements of current creditors (125.9% in FY2003), right now, it can only fulfill 82% of the creditors demand given its current assets.
The significant decline in the company’s liquidity ratio is a clear demonstration of moribund inventory management. The poor state of liquidity ratio becomes perceptible when compared against the backdrop of negative working capital NBC Plc has operate with ever since 2004 (ECL Asset Management Limited, 2008, p.4).
Summary and Conclusion
As of now, Nigerian Bottling Company’s share is trading at N49 which is quite below its year high of N69. Nevertheless, the company’s stock price is highly unstable and has a bearish outlook. In addition, the share price is trending downwards with a 200 shifting average of +13.3%. The stock price of NBC could as well be maintained between N49 and N53 if several valuation techniques such as discounted cash flow, price/earnings multiples and dividend discount methods are used.
It goes without saying that the company’s stock is fairly priced at its current rate of N49. Nonetheless, concerns abound whether NBC’s present fundamental is robust enough to raise the stock price to its year high level in the interim period based on the current market environment. As a result, shareholders with long-term prospect are likely to hold and observe the performance of this stock (ECL Asset Management Limited, 2008, p.4).
References
Chen, AC 2001 Using Free Association to Examine the Relationship between the Characteristics of Brand Associations and Brand Equity, Journal of Product and Brand Management, 10.7,125-146.
ECL Asset Management Limited. 2008 Equity Research: Nigeria Bottling C. Web.
Kumari, G, Bhat, J & Pandey KM 2010 Recruitment and Selection Process: A Case Study of Hindustan Coca-Cola Beverage Pvt.Ltd, Gangyal, Jammu, India, International Journal of Innovation, Management and Technology, 1.4, 441-446.
Lim, K & O’Cass, A 2001 Consumer Brand Classifications: An Assessment of Culture of Origin versus Country of Origin, Journal of Product and Brand Management, 10.2, 54-68.
Moody’s Investors Services. 2011 Credit Opinion: Coca-Cola Hellenic Bottling Company, Global Credit Research, Athens.