Join our community of smart investors

Bottoms up for Diageo

RESULTS: Diageo's investment in emerging markets is paying off, helping to offset declines in such weak spots as Europe and to fuel earnings growth
February 1, 2013

Once again, it was Diageo's (DGE) emerging markets focus that drove the drinks giant's first-half progress - underlying sales rose 5 per cent year-on-year, the gross margin jumped 70 basis points and adjusted operating profit grew 9 per cent to £2.03bn. Demand from the emerging middle classes in these fast-growth regions is more than compensating for duller performances in the group's more developed markets.

IC TIP: Buy at 1860p

Faster growth markets now comprise 42 per cent of Diageo's net sales and they delivered organic net sales growth of 14 per cent - driven by Latin America, Asia and Africa. In Africa, demand for spirits and beer, along with investment in core brands, helped underlying operating profit rise 16 per cent to £194m. Price increases across the region offset higher commodity costs and overheads, too, helping the operating margin here to rise 180 basis points. Meanwhile, in Latin America, underlying operating profit grew 20 per cent to £251m, driven by demand for scotch - Johnnie Walker, Buchanan's and Old Parr have extended their leadership in the region.

There were, however, areas of weakness - notably in North Asia, where underlying sales fell 14 per cent reflecting a contraction in the Korean whisky market. While, in India - where vodka sales struggled - organic sales fell 5 per cent. But that was more than offset by robust conditions in south east Asia and China. Here, growth was achieved through price increases, helped by the Chinese consumer's taste for expensive brands - sales of pricy reserve brands rose 59 per cent. Overall, Asia Pacific saw operating profit jump 10 per cent to £200m, with the operating margin having risen over 100 basis points.

North America performed solidly, too, with operating profit up 8 per cent to £765m and organic net sales up 5 per cent. But it was a different story in in Europe, where organic net sales fell 3 per cent. Indeed, net sales in southern Europe tumbled 19 per cent, although such weakness was significantly offset by strength in Russia, Turkey and Eastern Europe.

Oriel Securities expects adjusted EPS of 104.4p for end-June 2013 (2012: 77.8p).

DIAGEO (DGE)
ORD PRICE:1,860pMARKET VALUE:£46,656m
TOUCH:1859-1861p12-MONTH HIGH:1891pLOW: 1401p
DIVIDEND YIELD:2.4%PE RATIO:18
NET ASSET VALUE:252p*NET DEBT:106%

Half-year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20115.761.8638.216.6
20126.041.9661.518.1
% change+5+5+61+9

Ex-div: 27 Feb

Payment: 8 Apr

*Includes intangible assets of £8.91bn or 355p a share