Diageo Q1 trading statement

Fair Value 1700p (-4%)       BUY

News published on October Thursday 18, 2012
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Diageo has reported organic sales growth for its first quarter of 5% (incl. 2% volume growth) compared with 9% organic net sales growth in the year-earlier period. Although the 5% growth was in line with consensus estimates, organic sales growth of 2% in Asia disappointed the market and put the shares under pressure just after the publication of the interim statement (-2%). We consider this negative reaction unjustified.


ANALYSIS

  • Asia delivered a meager 2% due to delays in the shipment of products to Global Travel customers. Without this delay organic sales in Asia would have topped 10%. The company continues to expect "very strong" double-digit growth in China and double-digit growth in South East Asia. It also noted some softness in the Indian vodka market, whereas in the developed markets, South Korea was also soft, but Australia improved.
  • In 
  • North America organic sales growth stood at 6% (in line with the consensus), boosted by a healthy performance in the spirits segment with flattish beer sales.
  • Organic sales in Europe fell 1% (ahead of the consensus forecast for -3%) with Turkey, Russia and Eastern Europe all continuing to perform strongly and delivering double-digit net sales growth (more than 30%). Western Europe was weak (-5%) in view of comparison with the strong yearearlier period. Southern Europe and Ireland remained affected by the economic situation in these markets whereas in France consumer demand remained weak following the duty increases implemented in January. For the full year, Diageo continues to expect a flattish European market.
  • Africa delivered further double-digit net sales growth of 11% (vs. estimates of 9%) as strong growth in spirits in South Africa and in beer in East Africa offset weakness in Nigeria (where high inflation is putting the consumer and beer markets under pressure). Latin America and the Caribbean delivered equally strong net sales growth (+16%) despite tough comparison with the year-earlier period.

VALUATION
  • Diageo is trading at 17.4x 2012/13 EPS, which is more expensive that the 16.7x for Pernod Ricard
NEXT CATALYSTS
  • 5-6 November Miami investor conference
Analyst : Nikolaas Faes / 33(0) 1 56 68 75 22 /nfaes@bryangarnier.com
Sector Team : Peter Farren, Loïc Morvan, Cédric Rossi

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