Reiterate Hold amid painful sell-off. Markets are in risk-off mode and Turkey is but one of those being swept by deteriorating investor sentiment. Z-spreads of most Turkish corporate bonds have widened 30-40% and this may not be the end of the sell-off yet. In this environment, Cola Icecek (CCI), one of the strongest credits among corporate issuers, reported excellent results in what was a challenging year. CCI managed to pass through most of the TRY depreciation on to customers while maintaining sales volume, protecting margins, increasing cash flow generation and liquidity, and reducing leverage to a conservative level of 1.2x. We reiterate our Hold recommendation on the bonds.
Growth in revenues amid challenging macro in key markets. In 2019, CCI’s revenues increased 15% to TRY12.2bn on flat volumes as the company adjusted prices to address TRY depreciation. Translated into USD using average exchange rates, CCI’s revenues came to US$2.2bn posting a 2% yoy decline. Turkey (the largest market for the company), Pakistan and Kazakhstan together account for c80% of revenues. In all three, domestic currencies lost value versus USD in 2019. TRY depreciated 18%, Pakistani rupee (PKR) 23% and Kazakhstani tenge (KZT) 11%. Against this challenging backdrop, CCI’s approach to pricing proved to be efficient, allowing it to protect volumes and profitability. In 2020, management expects to increase sales volume by 3-4% yoy and increase revenues by 15-18% yoy in constant currency (TRY) terms through higher volumes, prices and adjustments to the product mix.
Profitability and cash flows improved despite headwinds. In 2019, EBITDA increased 25% yoy to TRY2.3bn, or 8% yoy in USD terms to US$405mn. EBITDA margin was 19%. Higher realised prices, cost control and a cash designation mechanism, which fixed TRY exchange rate at 3.95 on US$-denominated sugar and packaging cost for 2019, helped to preserve and increase profitability (+2ppts to EBITDA margin). In 2020, cash designation will not be used, but management expects that EBITDA margin will decline only 1ppt due to cost savings. The trend in the operating cash flow followed that of EBITDA’s – operating cash after the change in working capital was up 16% yoy to TRY2.3bn. Free cash flow before dividend was up 46% at TRY 0.9bn (or up 25% at US$164mn in USD-terms). Strong cash flow translated into higher cash reserves, which amounted to US$474mn at year-end.
With net leverage at 1.2x, debt is not high on the list of risks. In 2019, CCI reported US$932mn in debt, US$448mn in net debt and a net debt/EBITDA ratio of 1.2x, the lowest level in at least five years. For a company generating revenues in a mix of depreciating local currencies and with 85% of debt in hard currency, this is quite remarkable. Its debt maturity profile requires repayment of US$251mn in 2020, which is fully and excessively covered by the cash reserves with a ratio of 2:1. In fact, all maturities up until the US$500mn due September 2024, are covered by cash reserves. Low leverage, high cash reserves, strong cash flow generation and a comfortable debt repayment schedule suggest that the company does a good job managing its financial position.