Diageo Plc – Strongly positioned for a recovery in consumer demand

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.

On 28 September 2020, the Company will hold the Annual General Meeting 2020.

Rationale for Valuation – Buy at GBX 2,496.50

• The return on equity (ROE) stood at 18.6% in FY20, which was higher than the industry. In the last three years, ROE was considerably above the peer’s average.
• Also, it has decent fundamental metrics as it has maintained an EBITDA margin above 30% for the last four years.
• Diageo witnessed a CAGR growth of ~2.89% in net revenue over the period of FY16 to FY20.
• The acquisition of Davos and Aviation G will drive the brand's current growth trajectory and expected upside potential.

Key Risks.

• 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.
• The Covid-19 pandemic has created extreme volatility in the short term as a result of the social restrictions implemented across the world. The impact of the virus on economic conditions over the medium-term is a highly uncertain post Brexit.

Recent News

On 17 August 2020, the Company stated that it had reached an agreement to acquire Aviation American Gin through the acquisition of Davos Brands LLC and Aviation Gin LLC. The total consideration of this acquisition is up to US$610 million, which includes a US$335 million of initial payment and further potential consideration of up to $275 million (which is based on the performance of Aviation American Gin over a ten-year period). 

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

(Source: Company Website)

• 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 Company delivered solid cash flow, with net cash from operating activities of £2.3 billion and free cash flow of £1.6 billion.
• 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, an increase of 1.9% from 68.6 pence in FY19.

One Year Share Price Chart

1-Year Chart as of 4 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Technical Analysis

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

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

Conclusion

The Company delivered a strong financial position and good liquidity, which provides flexibility to continue to invest effectively in the business for the long term. The Company anticipates that they will deliver the return of up to 4.5 billion pounds of capital to investors from FY2020 to FY2022. While the trajectory of the recovery is uncertain, with volatility expected to continue into the financial year 2021.

The recent acquisition will drive the brand's current growth trajectory and expected upside potential. Overall, the Group seems to be well-positioned to emerge stronger. Reported profitability metrics for the financial year 2020 stood higher than the industry median, reflecting higher revenue generation and better control over expenses. In the last five years, DGE share price has delivered approximately 47.84% return, which also shows that the stock has outperformed the index (FTSE 100). The stock made a 52-week low and high of GBX 2,050.60 and GBX 3,633.50, 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 closing market price of GBX 2,496.50 (as on 4 September 2020), with lower double-digit upside potential based on 26.50x Price,/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Aggreko Plc – Maintaining a strong financial position.

Aggreko Plc (LON: AGK) has operational interests in providing modular, mobile power and related solutions. The operational segments are divided into Power Solutions and Rental Solutions.

Rationale for Valuation – Hold at GBX 415.20

• EV/Sales, EV/EBITDA, P/E and P/CF multiples of the AGK are currently lower than industry. It reflects that shares are undervalued against the Support Services industry.
• Also, it has decent fundamental metrics as it has maintained a Gross and EBITDA margin above 25% for the last three years.
• In the past several years, the Company recorded a lower debt-equity ratio of 0.52 (H1 FY20) against the industry median, which reflects that AGK is less leveraged as compared to the industry.

Key Risks

• Failure to deliver critical contracts effectively could affect the revenue and profitability of the company.
• Global macroeconomic uncertainty, failure to identify, develop and deploy new technology could hinder growth.
• Currently, the Company is also impacted by COVID-19 pandemic and the lower oil price.

Recent News

On 6 August 2020, the Company announced the appointment of Mark Clare as a Non-executive Director and Chair Designate, with effect from 1 October 2020.

Financial Highlights (for the six months ended 30 June 2020, as on 6 August 2020)

(Source: Company Website)

• Overall results were down due to the impact of COVID-19 and the lower oil price.
• It witnessed strong liquidity and cash position, with operating cash inflow of £250 million, immediately available liquidity of more than £700 million (including cash on hand of £123 million) and net debt of £499 million.
• ROCE (Return on capital employed) increased to 11.2% (H1 FY19: 10.2%), reflects a solid profit performance in H2 FY19.
• The pipeline stays strong, with mining the largest sector, particularly across Australia and Africa.

One Year Share Price Chart

 1-Year Chart as of 4 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Technical Analysis

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

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

Conclusion

The Company expects that the pre-exceptional profit before tax for FY20 will be in the range of £80-£100 million. Also, it expects to deliver improved margins and achieve the mid-teens ROCE target. For the full year, the fleet capital expenditure is expected to be slightly below £200 million against the previous guidance.

Overall outlook remains a high degree of uncertainty, but the Company entered the year with positive momentum. AGK has gradual improvement in demand, which has seen in some sectors since May 2020. It has taken effective steps to reduce the cost base and increase the cash generation, which will give a strong financial position in the upcoming months. The Company will pay an interim dividend per share of 5 pence. On leverage front, the Company is less leveraged against the industry, due to a lower debt/equity ratio.  AGK’s stock has delivered a positive return of around 8.82% in the last month. The stock made a 52-week low and high of GBX 285.90 and GBX 881.00, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Aggreko at the closing market price of GBX 415.20 (as on 4 September 2020) and will recommend fresh buying at the right time.

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

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

* The “Buy” recommendation is valid for the current price as covered in the report as on 7 September 2020.

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