Diageo plc Ordinary 28,101/108p (DGE)

Company overview

Diageo is a major global manufacturer and distributor of spirits, wines and beers.  Premium drinks included are Smirnoff vodka, Johnnie Walker Scotch whiskies, Guinness stout, Baileys Irish Cream, J&B Scotch whisky, Captain Morgan rum and Tanqueray gin. The group operates in 180 marketplaces, with around one third of business generated in each of Europe and North America respectively.

HL Comment (9 February 2012)

The group's half year results saw the drinks company reporting a solid performance. Organic net sales rose by 7% to £5.75 billion, with the figure aided by price increases, whilst volumes increased by 3% on the same organic basis. Sales growth in the Emerging Markets continued to lead the way. Sales for the group's Latin America and Caribbean region jumped by 23% driven primarily by scotch which gained market share in Brazil, Venezuela, Mexico and Colombia. Net sales for the company’s Africa business grew by 18% with the group’s Johnnie Walker brand proving a positive feature, while sales in emerging European markets helped offset still difficult Southern European regions. Accompanying management comments noted that the group was "well-placed to meet its medium-term financial targets of 6% annual sales growth, margin expansion and 10% plus earnings growth."

Negative points:

• Management comments noted "caution with regards to consumer and economic trends faced in 2012."
• Trading conditions for its Southern European markets remain challenging.
• The group's Wine business remains a tough category. While volumes proved to be flat, intense price competition led to a negative price/mix.
• Exchange rate fluctuations, while sometimes aiding can also hinder. An adverse £30 million impact on operating profit before exceptional items was largely attributable to the weaker African currencies and the adverse transaction exchange rate movements in the US dollar.
• Net borrowings were £8.29 billion as of 31December 2011 having been £6.45 billion as of 30 June 2011. The increase was primarily due to the acquisition of Turkish drinks manufacturer Mey İçki for £1.3 billion.
• Like other brewers, the cost of raw materials such as wheat and barley remain a concern in the background.
• Stricter alcohol regulation could impact Diageo's businesses.

Positive Points:

• The company's Emerging Market business grew net sales by 18% and operating profit by 23%. The regions now accounts for almost 40% of group business. For the group’s North Asian business, Guinness performed strongly, with net sales up over 30% driven by television advertising in Korea.
• For the group's North American division, whilst volumes remained flat, price increases saw organic net sales grow by 5%.
• In the previous financial year, Diageo spent £1.6 billion on expanding its presence in the Emerging Markets. It took a controlling stake in Serengeti Breweries in Tanzania, an equity stake in Halico in Vietnam, acquired Mey Icki of Turkey, made an additional investment in ShuiJingFang in China and bought a controlling stake in Zacapa, a super-premium rum.
• Management is pursuing a programme to save £160m of costs by the end of fiscal year 2013.
• A progressive dividend policy continues to be pursued – the half year dividend was increased by 7% to 16.60 pence per share.

Consensus

On balance, market consensus indicates a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.

Year Ending	Revenue (m)	Profit Before Tax (m)	EPS (p)	P/E Ratio	PEG	EPS Growth (%)	Total Dividend	Dividend Yield
30-06-2011	13,232.00	2,360.00	76.20	15.20	1.00	16.00	40.40	3.20
30-06-2010	12,958.00	2,239.00	66.30	14.70	4.90	3.00	38.10	3.60
30-06-2009	12,283.00	1,990.00	64.50	12.50	1.60	8.00	36.10	4.10
30-06-2008	10,643.00	2,093.00	58.26	14.30	0.50	28.00	34.35	3.70
30-06-2007	9,917.00	2,095.00	50.20	20.70	n/a	(25.00)	32.70	3.20