Czech inflation declined from 2.5% to 2.1% yoy in November, coming in below all estimates. Prior to the release of the preliminary CPI estimate, the market consensus was for stagnation at 2.5% yoy, whereas we had expected a slight decline to 2.4%. Having forecast November inflation of 2.2% yoy, the Czech National Bank was surprised again, but the other way round this time compared to October, for which it had assumed the same annual figure. As usual, the final inflation print did not alter the overall dynamics of consumer prices, but it provided detailed data on the structure.

Czech inflation declined from 2.5% to 2.1% yoy in November, coming in below all estimates. Prior to the release of the preliminary CPI estimate, the market consensus was for stagnation at 2.5% yoy, whereas we had expected a slight decline to 2.4%. Having forecast November inflation of 2.2% yoy, the Czech National Bank was surprised again, but the other way round this time compared to October, for which it had assumed the same annual figure. As usual, the final inflation print did not alter the overall dynamics of consumer prices, but it provided detailed data on the structure.

The discrepancy between our forecast and the actual figures was largely due to ongoing volatility in food prices. In November, food and non-alcoholic beverage prices fell by 1.0% mom, while alcohol and tobacco prices were down by 0.6% mom. In contrast, both of these price categories rose by 1.1% mom in October. In annual terms, growth in food and non-alcoholic beverage prices slowed from 3.6% to 2.2%, and from 4.3% to 4.0% in the case of alcohol and tobacco. We estimate that food prices, including all beverages and tobacco, contributed 0.2-0.3pp to the decline in headline inflation from 2.5% to 2.1% yoy in November.

Regulated prices were also on the soft side in November. They declined by 0.5% mom, driven by a further reduction in household energy prices. Before the start of the heating season, most energy suppliers announced another round of price cuts. Energy prices fell by an average of 0.7% mom in November. However, the overall dynamics suggest that developments in the non-energy part of regulated prices – comprising healthcare, education and public transport services – were subdued too.

The easing of pressures on consumer price growth was also confirmed by core inflation. In November, core inflation fell to 2.6% yoy, having stagnated at 2.8% for the previous three months. This was below both our own (2.7%) and the CNB’s forecast (2.8%). We estimate that seasonally adjusted mom core price growth slowed from 0.2% to around 0.1% in November. Imputed rents also slowed, from 0.7% to 0.2% mom (NSA), but we saw a similar development last year and so annual growth remained unchanged at 4.8%. By contrast, paid rents accelerated from 0.5% to 0.6% mom and from 5.8% to 6.2% yoy. Prices of package holidays fell significantly by 1.9% mom. While the November decline is relatively normal from a historical perspective, holiday prices stagnated mom last year. This contributed to the slowdown in annual package holiday price growth this year, from 5.4% yoy in October to 3.3% yoy in November.

Prices for both goods and services showed subdued dynamics, with fuel being the exception. Goods prices declined by 0.6% mom in November, while services prices rose by just 0.1% mom. In yoy terms, growth in goods prices slowed from 1.3% to 0.6%, while services prices remained at a still-high 4.6% yoy, probably reflecting developments in imputed rents. Fuel prices increased by 1.6% mom in November, ending a three-month period of decline. This may have been influenced by restrictions on petroleum product exports from Russia.

Following an expected average of 2.4–2.5% this year, we forecast a fall in inflation to below the central bank’s 2% target next year. This is likely to be strongly influenced by the probable transfer of renewable energy payments from households to the state, as promised by the incoming government. However, it remains to be seen whether this will happen as early as January, as originally planned.

We reiterate our Buy recommendation for Kofola CeskoSlovensko shares and a new target price of CZK557 per share (the previous recommendation and TP were Buy and CZK402 as of September 3, 2024). Kofola should benefit from organic growth and consolidation of recent acquisitions. In particular, the Pivovary CZ brewery group.

We reiterate our Buy recommendation for Kofola CeskoSlovensko shares and a new target price of CZK557 per share (the previous recommendation and TP were Buy and CZK402 as of September 3, 2024). Kofola should benefit from organic growth and consolidation of recent acquisitions. In particular, the Pivovary CZ brewery group. 

Business Outlook: In our model, we estimate revenue at CZK10.7bn and EBITDA at CZK1.76bn in 2025. From 2025 to 2029, we expect an average revenue growth of +3.0% and an EBITDA growth of +4.1%. Further acquisitions that would complement Kofola's existing operations are possible. Mergers and acquisitions (M&A) are one of Kofola's growth channels.

Valuation: We used the Discounted Free Cash Flow (DCF) model for the period from 2025 to 2029 to determine the valuation of Kofola shares. We assumed a weighted average cost of capital (WACC) of 7.0%-7.7% for the period and 7.7% for the terminal phase. This includes a discount for lower liquidity. We incorporated a long-term growth rate of 2% into our calculation. Based on the DCF model, we determined Kofola's valuation to be CZK557 per share. Compared to the current market price, this indicates a premium of +16.0%. The total potential, including dividends, is +20.6%. This corresponds to a Buy recommendation.

Based on our model, we value Kofola at a P/E ratio of 14.6x and an EV/EBITDA ratio of 8.5x (2026). The median for comparable companies is 19.6x and 14.6x, respectively. These figures suggest that Kofola is trading at a significant discount to the sector (25% and 42%, respectively). One possible explanation is the smaller Free Float. At the same time, Kofola offers a decent dividend yield, the highest among its competitors.

Main risks: In our opinion, the greatest risks include the significant increase in the prices of input materials, such as packaging and sweeteners. We also consider energy prices, which rose significantly during the energy crisis. Additionally, there are various risks related to restrictions on distribution channels, similar to those experienced during the Coronavirus crisis. There is also the possibility of an increase in taxes, e.g., on sweetened beverages. Another risk is a decline in the real purchasing power of consumers, which would likely reduce demand.