Diageo PLC

Diageo PLC (DGE) is a London-based global alcoholic beverage company that offers a broad collection of over 200 brands across spirits and beer in more than 180 countries across the world. The group’s operations are differentiated in geographical segments: Latin America and the Caribbean, Africa, Europe and Turkey, North America, Asia Pacific and ISC. These brands include Captain Morgan, Johnnie Walker, Baileys, Don Julio, Cîroc and Ketel One vodkas, J&B, Smirnoff, Crown Royal, Buchanan's and Windsor whiskies, Tanqueray and Guinness amongst others.

Financial Highlights (H1 FY 2019, in £m)

 (Source: Company Filings)

The company reported a growth of 5.8% in net sales to £6.9 billion, supported by positive organic net sales growth across all regions. Driven by strong organic volume growth and positive price mix, organic net sales grew by 7.5% in the first half of FY 2019. Driven by organic operating profit growth of 12.3%, reported operating profit rose by 11% to £2.4 billion. Reported operating margin increased by 164bps while organic operating margin improved by 152bps, reflecting efficiencies from the company's productivity programme and improved price/mix. 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%. 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 rose by £356 million to £1.6 billion.

Valuation Methodology 
Method:  Price/Earnings Approach (NTM)


Share Price Commentary

Daily Chart as at July-15-19, before the market closed (Source: Thomson Reuters)

 
On 15 July 2019, at the time of writing (before the market closed, GMT 4:22 pm), DGE shares were trading at GBX 3,403.50, up by 0.37% against the previous day closing price. Stock's 52 weeks High and Low is GBX 3,500.50/GBX 2,513.00. The company's stock beta was 0.77, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £80.09 billion, with a dividend yield of 1.96 per cent.

Conclusion
Over the past couple of years, the company has delivered strong performance, with consistent top-line growth and strong cash flows. The company operates in an attractive industry supported by strong consumer fundamentals, helping the group in expanding its organic operating margins while increasing investment in its brands. The company on 20 January 2019 announced that it plans to return up to £3.0 billion to shareholders in the financial year 2019 through share buyback programme. The company expects a 175bps organic operating margin improvement over the three years ending 30 June 2019 and to deliver organic net sales growth towards the upper end of the mid-single digit range. However, as the company is highly diversified, it must comply with different regulations across countries. Economic, political, or social uncertainty can contribute to a reduction in demand for the company's products. Brexit can potentially adversely impact economic conditions which might affect Diageo's business operations and financial performance, or trade wars or any tariffs, duties or other restrictions or barriers imposed on the import or export of goods between territories can affect the supply chain. Increase in cost of commodities or rise in wages due to a shortage of labour will result in inflation which has the potential to change the cost of production for the company. Additionally, the company will publish its full-year results on 25 July 2019. Therefore, based on the above rationale and valuation as done above, we recommend investors to “HOLD” the stock until further development or results are announced, at the closing price of GBX 3,391 as on 12 July 2019.

Unite Group

Unite Group PLC (UTG) is a Bristol, United Kingdom-based manager and developer of student accommodation with approximately 130 properties across 22 leading university towns and cities in the UK. The group operates Unite Students, which is the largest developer and operator of purpose-built student accommodation in the United Kingdom, providing homes to around 50,000 students. The operations of the company are differentiated in two operating segments, namely Operations and Property.

Recent Development
The company on 3 July 2019 announced that it had acquired Liberty Living Group PLC for a total consideration of £1.4 billion. The Liberty Living portfolio is a high quality portfolio of purpose built student accommodation comprising 24,021 beds and the group is a wholly owned subsidiary of Canada Pension Plan Investment Board, which will receive a stake of 20% in the enlarged group upon completion. The acquisition would help in sustaining medium term rental growth outlook of the group and deliver £15m of annual cost synergies from 2021, with material earnings accretion from 2020 onwards.

Financial Highlights (FY 2018, £m)

(Source: Company Filings)

As a result of a higher level of EPRA earnings of £88.4 million in 2018 as compared with the £70.5 million in 2017, which helped offset a decline in valuation gains and profit on disposal, the company posted an increase in profit before tax of 7% from £229.4m in FY17 to £245.8m in FY18. A 25% increase in EPRA earnings helped in delivering a 13% increase in EPRA earnings per share. Profit for the year was £237.3m, while basic earnings per share were 90.8p. The company reported a 98% occupancy and like-for-like rental growth of 3.2%, helping to declare an increased dividend, which was up by 28% to 29.0p per share. While net debt increased by 7% to £856m, cost of debt was reduced to 3.8% and loan to value fell to 29%.

Valuation Methodology 
Method:  EV/EBITDAApproach (NTM)


Share Price Commentary
 
Daily Chart as at July-15-19, before the market closed (Source: Thomson Reuters)
 
On 15 July 2019, at the time of writing (before the market closed, GMT 2:50 pm), UTG shares were trading at GBX 1,028, up by 0.38% against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,045.00/GBX 793.00. The company's stock beta was 0.85, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £2.98 billion, with a dividend yield of 2.83 per cent.

Conclusion
The company reported that rental growth outlook for 2019/20 was 3.0-3.5% on a like-for-like basis and reservations for 2019/20 academic year was at 75% in line with record levels in 2017, helping fuel the rally currently seen in the market. Moreover, the inward-looking immigration policy undertaken by the British government has meant that the company faces a potential reduction in demand and hence profitability and asset value, which was further exacerbated by Brexit impacting numbers of EU students coming to study in the UK.

Based on headwinds faced by the company, we have given an “AVOID" recommendation at the closing price of GBX 1,025 (as on 12 July 2019), with support from few catalysts needs to be evaluated at a later stage.
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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