Coca-Cola Europacific Partners is trading at a yield of 7.4% FCF (NASDAQ:CCEP)

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Introduction

Coca-Cola Europacific Partners (NASDAQ: CCEP) was one of my favorite Coca-Cola bottlers because this company has a monopoly on the production, marketing and distribution of Coca-Cola (NYSE: KO) products for several regions with high GDP per capita (Western Europe, two of the three Scandinavian countries – except Denmark – and Australia and New Zealand. While CCEP originally focused only on European countries, the acquisition of Coca -Cola Amatil in 2021 expanded its footprint, which added the last two countries.

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CCEP has a highly liquid listing in the United States and the Netherlands where it also trades with CCEP as its ticker symbol on Euronext Amsterdam. As CCEP reports its financial results in euros, I will use the euro as my base currency throughout this article and refer to the company’s shares listed in Amsterdam where the average daily volume is nearly 30,000 shares per day. If you’re looking for liquidity, the US is vastly superior, as the average daily volume in the US is around 1.4 million shares per day. There are currently approximately 457 million shares outstanding, giving a market capitalization of €21.7 billion.

For a better understanding of the business model, I would like to refer you to an older article as this article is meant as an update of previous coverage.

Good results in the first half

The first quarter is usually the weakest, but Coca-Cola Europacific Partners was still able to report revenue of almost 8.3 billion euros, resulting in a gross profit of 2.99 billion euros. This is an excellent result because the gross margin increased by around 44% while the turnover increased by “only” 40%. Other operating expenses also increased at a rate of less than 40%, and this is why the operating result amounted to EUR 967m, an increase of almost 86% compared to the first half of the year. ‘last year. Although this is the first year that the Amatil acquisition has contributed to a full fiscal year, it was the margin expansion that captured my interest.

income statement

CCEP Investor Relations

The acquisition of Amatil was fully paid in cash and this had a negative impact on the gross debt level, the net debt level and of course also on the interest charges. Despite this, the pre-tax result almost doubled and the net result shows a net result of 675 million euros, of which 667 million euros are attributable to the ordinary shareholders of CCCEP. This represents an EPS of EUR 1.46 per share as the number of shares barely changed (amounting to 457 million shares).

All of my previous articles have focused on CCEP’s cash flow performance to try to determine how attractive the company is, and it makes sense to take a closer look at the first half cash flow statement as well.

Reported operating cash flow was €1.65 billion, but this included a contribution of €456 million (compared to just €101 million in the first half of 2021). Thus, excluding changes in working capital, CCEP’s operating cash flow increased to €1.2 billion from €1.01 billion. From the 1.2 billion euros, it is still necessary to deduct the 80 million euros of rents as well as the 98 million euros of interest payments. Thus, on an adjusted basis, operating cash flow was 1.02 billion euros (compared to 886 million euros in the first half of 2021).

Cash flow statement

CCEP Investor Relations

The total capex was exactly 200 million euros. Higher than the first half of 2021, but that’s normal as CCEP’s asset base has expanded. Adjusted free cash flow in the first half of 2022 (recognition of taxes and income and cash flow attributable to non-controlling interests) was around €755 million, for an FCFPS of €1.66. This is higher than the reported net profit, as the company recorded €386 million in depreciation charges, while the total capital expenditure + lease payments was only €280 million. .

The free cash flow result was roughly in line with the free cash flow forecast of 1.6 billion euros provided by CCEP. That’s EUR 3.5 per share and essentially means the stock is trading at a free cash flow yield of over 7%.

Recent acquisition of Australasian business will help reduce seasonal impact

As explained in a previous article, 2022 will be the first full year that the Amatil division will contribute to the consolidated results of the Coca-Cola Europacific partners. Although CCEP paid a fairly high price for Amatil (more than 12 times EBITDA before synergy benefits, as the initial offer was increased to bring the deal across the finish line), the entity combined still strives to realize the potential synergy benefits (although there aren’t many synergies to unlock as there is very little overlap).

The only significant benefit for CCEP is to see how the acquisition of Amatil will mitigate seasonality. In Europe, the summer months are the most important period for the sale of Coca-Cola products and the second and third quarters are traditionally the strongest, with the fourth and first quarters posting rather weak results. The acquisition of Amatil will be useful because the fourth quarter of the calendar year is its seasonal peak, which means that only the first quarter remains as a “weak” quarter in all divisions.

CCEP is continuing with its 50% dividend policy, which means that based on consensus estimates of EUR 3.30 EPS for this year, the dividend will be EUR 1.65 per share. As Free Cash Flow of EUR 3.50 will be higher than reported EPS, CCEP will retain approximately EUR 845 million of Free Cash Flow on its balance sheet, which will help reduce net debt, which will mitigate the impact of rising interest rates. on the market.

Balance sheet liabilities

CCEP Investor Relations

The balance sheet currently contains 2.05 billion euros in cash and short-term investments but around 12.6 billion euros in gross debt for a net debt level of around 10.5 billion euros. So while keeping 845 million euros in free cash flow seems like a lot of money, it’s actually only 5% of the net debt level. Fortunately, CCEP’s debt is mainly made up of fixed-rate bonds and the maturities are very well spread out. This means that the company could probably simply repay the bonds when they mature with more than 800 million euros per year of annual free cash flow retained. This also means that CCEP should be very well protected against rising interest rates. Just to give you an idea of ​​how important this is: six-year EUR bonds (the 0.20% bonds maturing in December 2028 shown in the image below) currently have a YTM of around 4.5%.

Debt breakdown

CCEP Investor Relations

Investment thesis

Coca-Cola Europacific Partners remains an attractively priced defensive choice. Thanks to the long-standing relationship with Coca-Cola and robust free cash flow, net debt isn’t too much of a concern, and over the next five years CCEP will likely retain around €4.5-5 billion. free cash flow, helping to rapidly reduce net debt.

The commitment to pay out 50% of profits in the form of dividends is also interesting. Not least because consensus estimates use FY2024 EPS of EUR 3.89 per share, which should translate into a dividend of EUR 1.94 per share for a yield of 4.1% based on the current dividend policy. The projected EV/EBITDA ratio using 2023 year-end assumptions (€3.1 billion EBITDA and net debt of €9.5 billion) is only 10, making the title very reasonably priced at this point.

I was hoping the stock price would drop a little more during the recent market turmoil, but it could very well be “waiting for Godot” and I think I could enter a new long position in the next few weeks .

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