Diageo PLC

Diageo Plc is a global leader in beverage alcohol with an outstanding collection of brands including Johnnie Walker, Crown Royal, J&B, Buchanan's and Windsor whiskies, Smirnoff, Cîroc and Ketel One vodkas, Captain Morgan, Baileys, Don Julio, Tanqueray and Guinness.

Trading Statement (as on 19^th September 2019)
The company announced that the year has started well in terms of trading and the company will continue to build on that momentum to deliver quality sustainable growth. This has been driven by smartly investing in marketing and growth initiatives and focusing on the expansion of margins at the same time.

The company has reported that given the current economic and business conditions, the expectations for this year's net sales growth will be in the middle of 4 per cent to 6 per cent and the operating profit is anticipated to be delivered with a surge of around 1 per cent ahead of the net sales. The company is immune to global trade policies because they have businesses globally, and hence, they are cautiously monitoring the global trade policy.

Financial Highlights (FY2019, £million)

(Source: Annual Report, Company Website)

As per the report, the net sales had jumped around 5.8 per cent year on year to £12.86 billion in 2019 from £12.16 billion in 2018. The company also reported the operating profit at £4.0 billion in 2019, up by 9.5 per cent year on year from £3.69 billion in 2018. This was reportedly driven by organic growth and by improved price and productivity benefits from everyday cost efficiencies, offset by cost inflation and higher marketing investment to a certain degree. The company reported that all its regional divisions contributed to the net sales growth performance.

Net Cash flow from operating activities was reported at £3.2 billion in the period,a year on year increase of £164 million and free cash flow generated in the period was £2.6 billion. Basic Earnings per share (BEPS) of GBX 130.7 in 2019 (continuing operations) increased by 7.4 per cent year on year from BEPS of 121.7 pence per share in 2018. EPS before the effect of exceptional items grew 10.3 per cent year on year to GBX 130.8 per share, because of higher operating profit and lesser finance charges. The final dividend proposed by the board was 5 per cent higher on a YoY basis and brought full-year dividend per share to 68.57 pence, respectively.

Share Price Performance

Daily Chart as at September-20-19, before the market closed (Source: Thomson Reuters)

On 20th September 2019, Diageo PLC shares were trading at GBX 3,242.50 at the time of writing before the market close (at 9:00 AM GMT), down by 0.64% against the previous day closing price. Stock's 52 weeks High and Low are GBX 3,633.50/GBX 2,513. The company’s stock beta was 0.71, reflecting the lower movement of the stock as compared to the benchmark index.

Conclusion
Diageo Plc has delivered another year of decent performance in the FY19, and the group achieved organic operating margin ahead of its target. Also, it has recorded a stronger free cash flow of £2.6bn. The board also announced the company's plan to return of capital to the shareholders of up to £4.5 billion for the period between fiscal years 2020-22. The company’s full-year dividend per share stood at 68.6 pence. This has been announced as a reflection of company's performance in the current year as well as the company's policy to increase the dividend each year, given that the dividend cover is in the range of 1.8-2.2 times of the earnings. For the year ended June 30, 2019, the dividend cover is 1.9 times of the Basic Earnings per share.

As we look ahead, the company expectations for this year's net sales growth will be in the middle of 4 per cent to 6 per cent and the operating profit is anticipated to be delivered with a surge of around 1 per cent ahead of the net sales. The company stays focused on building a robust and sustainable future for the business, the brands and the societies and communities. Primarily, in terms of return on equity, dividend yield, net margin, and EBITDA margin, Diageo stands ahead of its peers group companies.

Therefore, based on the above fundamental factors, we have given a “Hold” recommendation at the closing price of GBX 3,263.50 (as on September 19, 2019).
 

Surface Transforms PLC

United Kingdom-based Surface Transforms PLC (SCE) is a manufacturer and developer of carbon-ceramic products for the brakes market. The company is focused on manufacturing, selling, and designing carbon fibre components. The company engineers, manufacture and develop carbon-ceramic brake products. The Company also focuses on the recognition of new products and applications for carbon fibre bolstered ceramic non-friction and friction materials.
Financial Highlights (FY2019, £’000)

(Source: Preliminary Results, Company Website)

In the financial year 2019, the company’s revenue decreased by £361 thousand to £1,002 thousandas compared to the previous year data, driven by the delay in SOP (start of production) of the OEM (original equipment manufacturer) customers (namely OEM 6) hypercar, volatility of demand from aftermarket distributors and delayed SOP and production glitches at three of the group’s near OEM customers. During the current year, gross margin reduced to 61.6 per cent against the 67.4 per cent in FY18, due to reduction in volumes of development components and near-OEM sales mix.

In FY19, LBITDA (including tax credit and excluding share-based payments and nonrecurring staff costs) surged to £1,564thousand against the £1,382 thousand in FY18. Research costs rose to £2,074 thousand as compared to £2,002 thousand in FY18, which had been partly offset by a surged R&D tax credit of £921 thousand. Loss after taxation for the year 2019 stood at £2,059 thousand, an increase from the last year data. Loss per share stood at 1.64 pence in FY19 versus the loss of 1.66 pence in FY18.

Net Cash used in operating activities surged by £28 thousand to £2,196 thousandas compared with the financial year 2018 of £2,168 thousand. On 31^st May 2019, cash and cash equivalents stood at £1,925 thousand. In the year 2019, the capital expenditure decreased to £175 thousand against the £2,024 thousand in FY18.

Share Price Performance

Daily Chart as at September-20-19, before the market closed (Source: Thomson Reuters)

On 20th September 2019, Surface Transforms PLC shares were trading at GBX 24.25 at the time of writing before the market close (at 10:00 AM GMT), up by 1.04% against the previous day closing price. Stock's 52 weeks High and Low are GBX 26.75/GBX 8.25. The company’s stock beta was 1.32, reflecting the higher movement of the stock as compared to the benchmark index.

Conclusion
As in prior years, the main risk faced by the group is reflected to be the speed at which the clients and potential clients embrace the new carbon-ceramic product technology. The group has exposure to exchange risk; however, this is partly mitigated with natural hedging activities.

In terms of uncertainties, product sales are still anticipated to increase with future OEM projections now backed by contracts. Sales growth is anticipated to be moderate in the retrofit market through a surge in the number of distributors and the group’s board anticipates ongoing growth with OEM clients.

The company’s top-line performance and bottom-line performance has declined for the current period. The company is still in its development phase. The company will be impacted by the uncertainties created by the ongoing Brexit, as it will impact the company’s supply chain. As the company operates in multiple locations globally, its activities and operational performance can be impacted negatively due to regulation & compliance risk.

The group is trading near its 52-week high, suggesting that the upside potential might be limited, and the company can face stiff resistance at the current level. The company’s P/E multiple is negative as compared to the positive industry multiple.

Considering the risks associated with the company’s operations and weak financial performance, we believe that investors can “Avoid” the stock at the current price of GBX 24.25 (as on 20th September 2019, before the market close).

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