Diageo shares have been picking up in recent days and ahead of a trading update next month they have been given another boost.
Analysts at Berenberg have issued a buy note with a £23.50 price target, compared to its current share price of 1845.5p, up 22.5p. The bank said:
We believe our earnings forecasts are in line with consensus for 2015/16, although we appear to be ahead on cash generation. We forecast net sales of£10.5bn and operating profit of £3,078m (versus consensus of £3,008m).
Diageo’s key markets of the US and India are showing some early signs of improvement. In the US, the “activation army” initiative that commenced around a year ago and was directed at the US on-trade segment appears to have had an impact (National Alcohol Beverage Control Association – NABCA – data show a volume improvement in the US for Diageo to around 3.0% in recent months versus around 0.5% 12 months ago), although this improvement does not appear to be captured by Nielsen data (which focuses on off-premise data). In India, United Spirits’ (of which Diageo is the majority shareholder) 2016 results to March 2016 were strong (sales were up by 13% year on year and EBIT margins increased by 300 basis point year on year). However, we expect Nigeria to have experienced a tough trading environment due to a) difficult macro generally b) high comps from last year’s success of Orijin (a ready to drink) and c) currency weakness.
In 2015/16, we expect an improving top line that delivers growth (Berenberg: +4.0%) more in line with what we believe is the company’s potential. This will again combine with strong cash generation, leaving Diageo’s valuation (a 2016/17 estimated free cash flow yield of 4.9%, enterprise value/EBITA of 14.9 times and a dividend yield of 3.3%) as the lowest across our spirits coverage. Adjusting for the Moët Hennessy stake, we estimate Diageo’s 2017 estimated enterprise value/EBITA would be even lower at 14.2 times.
