Investors in Diageo had some excitement recently when the drinks group was said to be in the sights of Brazil’s richest man.
But while not convinced by the reports of a possible bid for Diageo from Jorge Paulo Lemann’s 3G Capital, analysts at Nomura have turned more positive on the Guinness and Smirnoff business. They moved their recommendation from neutral to buy and lifted their target price from £19.30 to £21.80, saying:
Following recent meetings with the company, we are more confident that the “bad newsflow” for the company is abating and that a recovery in growth should become visible in 2016. We shave our 2016 earnings per share estimate by 2% to reflect negative foreign exchange; however, free cashflow generation is better than expected and as we are now approaching year-end, we move our discounted cash flow forward by one year.
With an improving outlook, we have fewer worries about a possible dividend disappointment with full year results at the end of July (we now estimate full year dividend up up 5% versus previous 2%). In addition, with M&A being deemphasised, we see scope for possible buybacks to start during 2016.
We continue to see a recovery story for the global spirits industry. For the company, Asia-Pacific appears to be a bit stronger in the fourth quarter. In addition, an improving US industry environment could start to improve performance into 2016, although comps remain tough for the first half. Destocking in LatAm (due to finish at end-2015) and in Asia (still likely to run into first half of 2016) is as expected. This supports our view of an improving trajectory into 2016.
We remain sceptical about recent press reports of a bid for the company by 3G, but we do think this newsflow could mark a sea change in share price performance after two soft years. Diageo trades at a 2015 estimated PE of 21 times versus the spirits average of 21.7 times.
In a market still upbeat about the prospects of a Greek deal, Diageo is one of the FTSE 100’s biggest risers, up 41p at £19.48.
