Diageo Plc - Expects improvement in FY21

Diageo Plc (LON: DGE) is a FTSE 100 listed Alcoholic Beverage Company with a portfolio of beer brands and spirits. The Company produces over 200 brands and markets them in more than 180 countries around the world.

Rationale for Valuation – Buy at GBX 2,626.50

• The Company has decent fundamental metrics as it has maintained a Net margin above 10% for the last five years and ROE (return on equity) above 15% for the last three years.
• On the liquidity front, the current ratio was 1.77x in FY20, which was higher than the industry median. This reflects that the Company has sufficient current assets to pay short-term obligations and robust liquidity profile to tackle the challenging environment.
• In the last five years, the Company has delivered a sparkling return of ~53.87%, which was higher as compared to the FTSE 100 Index.
• From the technical standpoint, shares are trading well above the short-term support level of 20-day (GBX 2,577.5) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Covid-19 pandemic has created extreme volatility in the short term as a result of the social restrictions implemented across the world.
• Further, the impact of the virus on economic conditions over the medium-term is a highly uncertain post Brexit.
• The Company’s products are sold in more than 180 countries worldwide, which subjects the Group to risks and uncertainties in multiple jurisdictions across developing and developed markets.

Recent News

On 24 September 2020, the Company launched and priced €700 million of fixed-rate Euro (due September 2028) and £400 million of fixed-rate Sterling denominated bonds (due March 2033) under the European Debt Issuance Programme.

Financial Highlights (for the year ended 30 June 2020, as on 4 August 2020)

(Source: Company Website)

• The Company delivered solid cash flow, with net cash from operating activities of £2.3 billion and free cash flow of £1.6 billion.
• In FY20, the business has been significantly impacted by the Covid-19 pandemic.
• However, it has shown a strong balance sheet and was strongly positioned with the recovery in consumer demand.
• The Board has proposed a final dividend per share of 42.47 pence. This brings the full-year dividend per share for the financial year 2020 to 69.88 pence from 68.60 pence in FY19.

One Year Share Price Chart

(Source: Kalkine Group, Refinitiv)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has made a good start to the financial year 2021, with an improvement in all regions. It witnessed a robust demand in the off-trade channel, strong execution and the gradual re-opening of the on-trade channel in most markets. In the US region, Diageo is performing strongly and ahead of the anticipations. The guidance of FY21 has improved and expects a sequential improvement in organic net sales and operating profit. Overall, the Group seems to be well-positioned to emerge stronger. The stock made a 52-week low and high of GBX 2,050.60 and GBX 3,369.50, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Diageo at the current market price of GBX 2,626.50 (as on 29 September 2020, before the market close at 10:50 AM GMT+1), with lower double-digit upside potential based on 27.00x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Coca Cola HBC AG – Well-positioned to adapt the changing trend.

Coca Cola HBC AG (LON: CCH) is a FTSE 100 listed Beverage Company, which owns, operates, and control a network of independent bottling plants, warehousing, and distribution systems.

On 11 November 2020, the Company will announce the Q3 FY20 trading update.

Rationale for Valuation – Buy at GBX 1,927.00

• In the last six months, the Company has delivered a sparkling return of ~17.56%, which was higher as compared to the FTSE 100 Index.
• The Company using the cost synergies had optimised the operational structure to achieve sustainable growth in the near term.
• CCH is identified as amongst the leading bottlers globally and has a strong foundation for growth in the long-term period.
• From the technical standpoint, 14-day RSI stood at 35.37, which is supporting the upside movement.

Key Risks

• Due to Covid-19 situation, the consumer environment is weak, and it may impact the profitability in FY20.
• The risk of water unavailability can lead to an increased cost of doing business.
• Also, the inability to adopt the changing consumer health trends and health policies can lead to a loss of consumer base.
• Furthermore, volatility in foreign exchange rates amid recessionary economic condition can increase the cost base.

Financial Highlights (for the six months ended 26 June 2020, as on 5 August 2020)

(Source: Company Website)

• The Company continued to maintain the market share in Sparkling and Non-alcoholic ready-to-drink.
• Moreover, the lower operational profitability, coupled with a deterioration in working capital driven free cash flow down.
• Nevertheless, the liquidity position at July end remained robust with nearly €1 billion of cash and time deposits, after the dividend payment.

One Year Share Price Chart

(Source: Kalkine Group, Refinitiv)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Overall, the Company has a resilient business model, and it is well-positioned to adapt as markets reopen and shall emerge even stronger. The Company expects net finance cost to be nearly €70 million in FY20. During H1 FY20, the strong cost control has already brought €61 million of €100 million savings planned for the year.

The strong performance on market share amid challenging market conditions demonstrates the power of the portfolio of brands. Moreover, current trading continues to confirm sequential improvement. The Company could not provide full financial guidance for FY20.  According to the market, the demand for healthy drinks without altering the taste will propel the market growth in future. CCH has a strong balance sheet with adequate liquidity to meet financial commitments.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Coca Cola HBC AG at the current market price of GBX 1,927.00 (as on 29 September 2020, before the market close at 9:03 AM GMT+1), with lower double-digit upside potential based on 22.00x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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