Analysis of Kofola: A quality company where you will find stability and strength like in the American Coca-Cola

The beverage giant, which has a significant position not only on the Czech market in the non-alcoholic beverage sector. Everybody knows it, everybody has drunk its product. Without exaggeration, it could be called the Czech Coca-Cola. Let's take a look at why you shouldn't overlook this strong representative of the Prague Stock Exchange in your investing.

Introducing Kofola

Kofola ČeskoSlovensko a.s., together with its subsidiaries, produces and distributes soft drinks in the Czech Republic, Slovakia, Slovenia, Croatia, Poland and internationally. It offers carbonated and non-carbonated beverages, water, syrups, jams, energy and isotonic drinks, fresh juices, fresh and salad bars, herbal teas and coffee bean blends. The company offers its products primarily under the Kofola, Vinea, Radenska, Studenac, Korunní, Rajec, Ondrášovka, Kláštorná Kalcia, Jupí, Jupík, Semtex, UGO, Leros, Café Reserva, Trepallini, Rauch, Evian, Badoit, Vincentka and Dilmah brands, as well as under private labels for third parties, such as supermarket chains. It is also engaged in the provision of road haulage services, trademark licensing, marketing activities and the operation of a network of fresh bars. Kofola's history dates back to the 19th century.


The IPO of the company took place in 2015. Kofola's shares are currently trading at CZK 275 as the price has fallen by almost 16% in the last year. The market capitalization currently stands at CZK 5.82 billion. Over the past 12 months, the PE ratio stands at 19.7, which is quite overvalued for a beverage maker.


Let's start with sales, which have been inconsistent over the past few years. A record of C$7.15 billion was achieved in 2015, and the company hasn't come close to that figure since. Last year, the company made CZK 6.64 billion, an improvement of 7.53% from 2020. Gross profit reached CZK 2.926 billion last year, which follows the trend of the last 4 years to keep gross margins at over 44%. This is quite acceptable given Kofola's business.

Now we can move on to EBITDA and net profit. Kofola reports only EBITDA, which it calculates as operating profit/loss plus depreciation and amortization. Normally, interest expense and taxes are added to EBITDA. So, as Koyfin reports, EBITDA was 912.5m last year, a 7.4% improvement on 2020. EBITDA margin has been above 13% for the last 5 years. Net profit was 248.8m last year, a decent 85% improvement on 2020, but we have to take into account the loss year 2018. PE has been around the 20 level for the last few years, but increased significantly in 2020 when profit was reduced due to covide.


Financial results

Within the earnings of companies, I am always most interested in the segments and geographic distribution of revenues and how they are trending. Most of the money comes from the CzechoSlovakia segment, i.e. sales of beverages in the Czech Republic and Slovakia. In total, the company made CZK 4.796 billion in these regions last year, which represents 72.3% of total revenues. This is a slight decrease compared to 2020, when the share was 73%. The second largest share is represented by the Adriatic segment, i.e. Slovenia and Croatia, which generated CZK 1.231 billion last year, which is 18.6% of sales. Interestingly, the share of sales in these countries increased by 0.9%. The last segment is Fresh & Herbs, where the company from Poland belongs, but also the Czech company Ugo or the Slovak Leros. Kofola earned 9.1% of sales here last year.


What specific products are making the most money? As we can see in the screen below, carbonated beverages are in the first place, earning CZK 2.527 billion in 2021, a 38% share. Following closely behind are waters, which sold a total of CZK 2.213 billion with a 33.4% share. Still drinks then have a 9.1% share, syrups a 7.7% share, fresh bars and salads a 3.7% share and the rest of the products an 8% share. The increase in the Water segment includes the impact of the acquisition of ONDRÁŠOVKA and Karlovarská Korunní (the acquisition took place in Q2 2020) and the increase in the Other segment is mainly due to sales of LEROS and Premium Rosa products, but also to sales of Semtex energy products.


In the next screen we can still see the geographical distribution of sales, which is intertwined with the three main segments already mentioned.


Within the balance sheet, we can notice that Kofola owns CZK 7.235 billion in assets, which is 4% less than in 2020. Here, fixed assets are predominant, numerically it is CZK 5.306 billion, which is a decrease of 6.6% compared to 2020. By far the largest item is land, buildings and equipment. This is logical, as this includes, for example, the halls in which the production of their products takes place. These assets accounted for over 60% of fixed assets. The second largest item is intangible assets, which include patents or trademarks. Intangible assets account for a total of 23.5% of fixed assets. It decreased compared to the previous year mainly due to amortisation.


The changes in liabilities were commented by the company as follows. The decrease in bank loans and borrowings is a result of regular repayments and also partial repayment of the company's overdraft facility. The firm's reserves increased due to higher employee remuneration and litigation-related provisions. The decrease in other non-current liabilities is related to the dissolution of a receivable from a government grant. Trade payables and other payables increased due to higher trade payables, CAPEX payables and higher advances received for returnable packaging.


The last important part of the annual report is cash flow, where I will focus on free cash flow (FCF). Free cash flow is the money that the company has left after paying for operating expenses and capital expenditures. Last year, the company was left with FCF of 864.5 million, clearly its best result in years. By comparison, in 2020, the company's free cash was at CZK 303.6 million, an improvement of 185%. Sure, this is an extraordinary jump, but if it holds up over the long term, it will boost the company's credit by a lot. Why has there been such a sudden increase? Firstly, operating free flow has increased significantly and capital expenditure (CAPEX), the higher amounts of which in the past were due to investment in production equipment, has decreased.


Finally, I would like to mention dividends. Over the past year, Kofola paid out a total of CZK 288,095 million to its shareholders. The company has kept dividends at the same level since 2018, at CZK 13.5 per share. The current share price of CZK 274 therefore implies a decent dividend yield of almost 5%. Within the dividends, we are still interested in the payout ratio, i.e. how much of its profits the company distributes to shareholders In the case of Kofola, it is over 93%, which is quite a lot. On the other hand, we would find many cases in the world where the payout ratio is kept above 100% for a long time and companies are still in good financial shape.


In terms of numbers, I will mention the total debt, which is quite high, at CZK 3.84 billion for the last year. However, this is already a 12.5% reduction from the 2020 covenant year. Hopefully this trend will continue to hold.

Please do not take the Coca-Cola comparison literally. Coca-Cola has, of course, complete financial strength and is the best of its industry. Rather, I was alluding to product similarity and breadth of business. Coca-Cola is a large company with an international reach that is not about one drink we all know. That's important to me. It has the potential to grow its brand more and more in countries like Poland, Croatia and others. Personally, I don't plan to invest in it yet, but it is certainly an interesting stock. Just from a diversification point of view. A beverage manufacturer, although it may seem boring, will 100% always find its customers.

This is not an investment recommendation. The text serves only as an inspiration for your own analysis before a possible investment.

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