Issuance activity: Tomorrow, MinFin is scheduled to auction CZK3.0bn of 8y bonds, CZK6.0bn of 10y bonds and CZK1.0bn of 13y bonds. Whereas only one primary auction (9 Nov) was indicated this month initially, tomorrow’s auction was added to the schedule last week. In December, one primary auction is scheduled so far (14 Dec) with a total amount of CZK10.0bn. This is surprisingly low, given that MinFin indicated a total issuance volume of up to CZK100bn in 4Q, but only issued CZK44.2bn in total in Oct-Nov until now (and plans to issue additional CZK20.0bn until the end-2022). The risk of an additional auction in December therefore prevails, in our view.

Issuance activity: Tomorrow, MinFin is scheduled to auction CZK3.0bn of 8y bonds, CZK6.0bn of 10y bonds and CZK1.0bn of 13y bonds. Whereas only one primary auction (9 Nov) was indicated this month initially, tomorrow’s auction was added to the schedule last week. In December, one primary auction is scheduled so far (14 Dec) with a total amount of CZK10.0bn. This is surprisingly low, given that MinFin indicated a total issuance volume of up to CZK100bn in 4Q, but only issued CZK44.2bn in total in Oct-Nov until now (and plans to issue additional CZK20.0bn until the end-2022). The risk of an additional auction in December therefore prevails, in our view.

Market situation: Czech IRS recorded a sharp decrease since the last auction (9 November) on the back of lowering core rates and downside surprise in Czech headline CPI in October. However, it was mostly caused by administrative measures, which temporarily lowered consumer energy prices. Core inflation still remained around 1% mom (not annualized). High financing needs in 2H22 are contributing to longer CZGBs being the cheapest since 2Q2020 in ASW terms. We also expect the issuance activity to remain elevated in 2023. Combined with unfavourable differential in real yields over US, we believe 5Y – 10Y CZGB yields are set to remain above IRS throughout the next year.

Rates outlook: Financial markets expect the CNB's two-week repo rate to peak at the current level of 7%, which is in line with our expectations. However, market pricing implies the first rate cut to take place in the 3M horizon, whereas in our view, the gradual reduction of interest rates may start only in 3Q23. This is because we expect inflation to accelerate in January 2023 amid the unwinding of the inflation-reducing special energy tariff. We’ve also identified other pro-inflationary risks (potential stronger repricing in January, higher wage growth, easier fiscal policy, de-anchored inflation expectations and continuing monetary policy tightening abroad) which may keep interest rates higher for longer.

Kofola ČeskoSlovensko reported third-quarter results yesterday after the market closed, marking the strongest quarter seasonally. Revenues grew at a decent pace across all sectors. However, high inflation caused margins to decline. EBITDA were down 10.5% yoy to CZK462m. The numbers are 3.4% above consensus when comparing EBITDA but missed the market estimate on net profit by 2.5%. For the full year, Kofola should reach the lower end of the original guidance. It emerged that, in addition to the high prices of materials, the company is beginning to experience problems with cooling demand. Thus, meeting the target may prove to be a challenge.

Kofola ČeskoSlovensko reported third-quarter results yesterday after the market closed, marking the strongest quarter seasonally. Revenues grew at a decent pace across all sectors. However, high inflation caused margins to decline. EBITDA were down 10.5% yoy to CZK462m. The numbers are 3.4% above consensus when comparing EBITDA but missed the market estimate on net profit by 2.5%. For the full year, Kofola should reach the lower end of the original guidance. It emerged that, in addition to the high prices of materials, the company is beginning to experience problems with cooling demand. Thus, meeting the target may prove to be a challenge.

In all segments (CS +11.3%, F&H +19.4%, AD +7.0%) Kofola recorded sales growth that surpassed even last year's record level. The reason for this is the price increase, which is based on rising material costs but also high volumes. Total sales increased by 11.0% yoy to CZK2,347m. The most important sector of CS accounts for over 71% of total revenues. The cost of sales increased (23.3% yoy) more than sales alone. The growth was particularly noticeable in CS. This was driven by growth in input materials and energy. Operating costs (marketing, sales, distribution) increased at a slightly lower rate (8.0% yoy) compared to revenue. However, administrative expenses decreased (-32.5% yoy) due to the revision of the option plan. EBITDA decreased by 10.5% yoy to CZK462.2m. The margin decreased by 4.7pps. All three sectors reported a positive result (CS CZK650m, F&H CZK35m and AD CZK195m). Net profit of CZK189.4m is 27.6% weaker compared to the same period last year.

Net debt/EBITDA is 3.0x in 3Q22, down slightly from 3.1x at the end of last year. 

Guidance: Kofola management has revised full-year projections. This is due to the difficult current situation and rising prices, which have led to cooling consumer demand. EBITDA is now expected to reach CZK1,080m, which represents the lower end of the previous goal (CZK1,080-1,115m). Revenue growth should reach +19% yoy (unchanged). Reported EBITDA YTD is 81.5% (or CZK 880m) of the full-year target (last year 87.4%). This leaves CZK200m for the final quarter of the year. This may seem ambitious in view of the current environment, as well as seasonality and the decline in demand.

Outlook for the next quarter. Traditionally, Kofola indicated sales dynamics in the last quarter of the year. Revenues grew by 7% in October. This is a slower pace compared to previous quarters. However, it points to decent growth for the full year. We expect the full-year growth target of +19% yoy to be met.