COCA-COLA ICECEK - Strong growth to continue: BUY

Strong volume growth in Turkish and International markets

Growth in Turkish and international unit sales were much better than our estimates in 4Q12. In our view, upside risks to our Turkish market growth estimates increase as 2012 had a low base. We maintain our constructive view on the Turkish consumer sector. BUY.

Will benefit from strong pricing and normalizing commodity prices
Increasing share of immediate consumption packages and better consumer sentiment should help profitability in Turkish operations. We do not expect major cost pressures on profit margins In its international operations. While we keep our profit margin estimates flat for 2013, the risk is to the upside in our view.

COCA-COLA ICECEK - Strong earnings growth: BUY

Upgrade to BUY on strong pricing and rising scale of global operations
We have a more positive view on the consumer sector after Turkey’s rating upgrade and the sharp decline in interest rates. We expect CCI to be one of the key beneficiaries of consumer demand revival. Strong pricing, robust volume growth and normalization in commodity costs should help improve profit margins further. Upgrade to BUY, from Hold

Higher free cash flow on strong earnings growth and lower capex
On top of the anticipated recovery in the domestic market, CCI’s global operations have attained significant scale, which should help reduce costs and contribute more to the profitability. We believe high profitability and lower capex will lead to a sharp increase in operating free cash flow. We expect CCI’s global operations to account for 38% of total EBITDA in 2013.

Raise TP by 13% on higher premium to peers and higher OPCF
We raise our EBITDA and net income forecasts by 5% each and 7% each for 2013 and 2014. We believe CCI deserves to trade at a higher premium to peers, as we expect CCI’s earnings growth differential with its peers to widen by 2ppt to 6% over 2012-15. Our new TP of TRY40.46 is based on a blended valuation (50/50 weights) using DCF and peer multiples.

Attractive consumer story for 2013, in our view
We believe the improved growth outlook for Turkey will support CCI’s consumer growth story. The rising share of global operations, which offers strong growth potential in terms of volumes and profitability, makes CCI much more attractive. The increasing share of immediate consumption packages and improved consumer sentiment should boost the profitability of the Turkish operations. In the international operations, any major cost pressure on profitability margins looks unlikely. While we keep our profit margin estimates flat for 2013, the risk is to the upside, in our view. Worse-than-expected weather conditions and sharp increase in commodity prices are downside risks to our investment view.

COCA-COLA ICECEK - Strong Performance: HOLD

Solid profitability on strong pricing environment & low input costs
In 3Q12, CCI posted TRY193.6m net income, slightly above our estimate of TRY185.5m thanks to higher than expected FX income. However, posted EBITDA was in line with our estimate. Posted EBITDA and net income beat consensus figures. Only surprise was lower volume growth in its Turkish operations due to lower than expected volumes in low margin tea sales.

EBITDA margins increased sharply in international operations
In both its international and Turkish operations, the company was able to raise unit prices remarkably in an environment of easing input cost pressures on lower sugar and resin prices. Moreover, economies of scale helped operating expenses in the international operations remarkably. We believe low prices for sugar and resin may not last long.

TP up by 15% on favourable peer valuations and lower cost of debt
On peer comparisons, the relative premium declined on the strong run of beverage stocks the last six months. Our DCF valuation also increased to TRY34.29 from TRY29.84 due to low cost of debt. We raise our EBITDA and net income forecasts slightly for 2013 and 2014. Our fair value is based on a blended valuation, assigning 50/50 weights to DCF method and peers.

Earnings upgrade was due to international operations
In our view, the current pricing environment will remain intact for 2013 and 2014, accordingly helping profitability margins. However, current levels of sugar and resin prices may not be sustainable in the medium term for CCI’s international operations. In our estimates, we plug in a rise in input costs from 2013 onwards. However, the current pricing environment should allow the company to maintain its profit margins. Hence, we raise our EBITDA and net income estimates for 2013 by 4% and for 2014 by 3% for the company. Worse-than-expected weather conditions pose a major downside risk to our projections and target price and new bottling right acquisitions are a key upside risk.