Diageo (DGE)

Diageo PLC is a British alcoholic beverage company, headquartered in London, United Kingdom. Along with over 200 brands across spirits and beer, which are sold in 180 countries, the company is a global leader in beverage alcohol. The company was formed in 1997 and employs more than 30,000 personnel. The company’s operations are differentiated in geographical segments: North America, Europe and Turkey, Africa, Latin America and Caribbean, Asia Pacific and ISC.

Key Financial Metrics (H1 FY 2019, in £m)

(Source: Company Filings)
 
The company reported a growth of 5.8% in net sales to £6.9 billion, which was driven by organic growth of 7.5%, while partially offset by unfavourable exchange. The Organic volume also grew by 3.5% and all regions contributed to broad-based organic net sales growth. Driven by organic operating profit growth of 12.3%, reported operating profit grew by 11% to £2.4 billion. The growth was due to efficiencies from the company’s productivity programme and improved price/mix. The cash flows continued to be strong, with free cash flow increased by £317 million to £1.3 billion, and net cash from operating activities increased by £356 million to £1.6 billion. While the basic earnings per share declined by 1.6% to 80.9p, pre-exceptional EPS rose by 13.6% to 77p, reflecting lower finance charges and higher operating profit. The company declared an interim dividend of 26.1p per share, reflecting an increase of 5%.

Valuation Methodology
Method: Price/Cash Flow Multiple Approach (NTM)


Share Price Commentary
 
Daily Chart as at Mar-29-19, before the market close (Source: Thomson Reuters) 

On 29th March 2019, at the time of writing (before the market close, at GMT 10:40 am), DGE shares were trading at GBX 3,124.5, down by 0.2 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 3,143.55/GBX 2,376.50. The company’s stock beta was 0.82, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £75.05 billion and a dividend yield of 2.12 per cent.

Conclusion
In the first half of the financial year 2019, the company reported strong results and delivered broad-based volume and organic net sales growth across all regions and categories. The company continues to expand its organic operating margins while increasing investment in its brands. The strong sentiments for the stock are evident from its current price level as well, which is near the 52-week high. Though the company became more leveraged, profitability margins were improved considerably. Based on strong financials and supported by valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 3,132 (as on 28th March 2019) with single-digit upside potential based on 24.24x NTM Price/Cash Flow multiple (approx.) on FY19E cash flow per share.
 

Taylor Wimpey (TW)

Taylor Wimpey PLC is a United Kingdom-based residential housing developer which operates at a regional level from 24 local offices across the country. It is one of the UK's largest residential developers and builds a wide range of properties, with a broad price range. The company’s operations are differentiated in two geographical segments: Housing United Kingdom and Housing Spain. The Housing United Kingdom segment is further sub-divided into North, Central and South West, London and South East (including Central London) and Corporate.

Key Financial Metrics (FY 2018, in £m)
 
(Source: Company Filings)
 
The company reported an increase of 2.9% in total revenue to £4,082.0 million as compared to £3,965.2 million in 2017, mainly driven by improved completions both in Spain and the UK. Operating profit rose by 4.3% to £880.2 million (2017: £844.1 million), resulting in an operating profit margin of 21.6%, against 21.3% in 2017. Margin declined slightly because of the negative impact of selling and build cost inflation. In FY18, profit before tax and exceptional items surged by 5.5 % to £856.8 million against £812.0 million reported last year, driven by better operational results and lower net finance costs. Profit for the year rose to 18.2% during FY18 to £656.6 million vs £555.3 million in FY17, due to the decrease in the post-tax exceptional charges and improvement in performance. The company’s adjusted basic earnings per share was 21.3 pence in FY2018 as compared to 20.2 pence in FY2017. Basic EPS was up by 18.2 per cent to 20.1 pence in FY18 as compared to 17.0 pence in FY17.

Valuation Methodology
Price/Earnings Multiple Approach (NTM)


Share Price Commentary
  
Daily Chart as at Mar-29-19, before the market close (Source: Thomson Reuters) 

On 29th March 2019, at the time of writing (before the market close, at GMT 10:45 am), TW shares were trading at GBX 175.54, down by 1.4 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 206.21/GBX 127.80. The company’s stock beta was 0.83, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £5.84 billion and a dividend yield of 3.50 per cent.

Conclusion
Despite the wider macro-economic and significant political uncertainty, customer confidence has continued to be resilient with strong levels of interest in the company’s developments. The company continues to prioritise on building a strong order book for the future and maintain a strong balance sheet, and a strategy focused on customers that make it a more resilient to uncertainty. Based on resilient strategy followed by the company, and supported by valuation done using the above method,we have given a BUY recommendation at the closing price of GBX 178.15 (as on 28th March 2019) with lower double-digit upside potential based on 10.40x NTM Price/Earnings multiple on FY19E earnings per share.
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

*The buy recommendation is valid for the current price as covered in the report (as on Mar-29-19).
 

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