26th Sep 2024 13:12
(Alliance News) - A trading statement from UK drinks manufacturer Diageo PLC on Thursday that was mostly as expected should reassure investors, analysts said.
In a brief update ahead of its annual general meeting on Thursday, the owner of the Johnnie Walker whisky and Guinness stout brands said the global economic environment "remains challenging for both our industry and Diageo".
But Chief Executive Debra Crew reassured that "our expectations are unchanged" from July when the brewer and distiller reported annual results.
AJ Bell's Russ Mould said that, while Diageo doesn't exactly sound "cheery", the fact trading remains in line with expectations is "prompting some relief" after a period when many shareholders will have been left "drowning their sorrows".
"The shares have jumped because of the absence of further bad news, rather than evidence of a turnaround," he felt.
Shares in Diageo were up 5.0% to 2,622.00 pence each in London on Thursday. They are down 15% in the past 12 months.
CEO Crew said drinks consumers continue to be "cautious in this environment", but added Diageo was focused on "strengthening the resilience of our business".
This would be achieved through productivity and strategic investments to win "quality market share".
Crew reported good progress on strategic initiatives, including US route-to-market enhancements, and in Nigeria where restructuring is "progressing well".
The Diageo boss believes that the fundamentals for global 'total beverage alcohol', and particularly the spirits industry, remain strong.
She is "confident that when the consumer environment improves, growth will return and the actions we are taking will position us well to outperform the market."
Jefferies said it expects the share price to be slightly better in the absence of further bad news which should be reassuring. The broker thinks stimulus measures in China are likely to lift the broader spirits group as well.
AJ Bell's Mould said Diageo is "pulling some levers internally" to position itself for a recovery in demand, with Crew under "some pressure to deliver after a difficult year-and-a-bit in charge".
"The problems the company faced in Latin America, where it had far more inventory than it needed, hinted at issues with controls and discipline in at least one area of the business. Having staked a position very much in premium spirits, which paid off during the pandemic when people were unable to go out and were buying high-end whisky, tequila and rum to consume at home, Diageo really needs to see a recovery in this part of the market," Mould added.
He suggested that Diageo could attract activist interest or potentially a takeover bid if it remains in the doldrums for much longer.
"There could conceivably be pressure to break up the group with Guinness being hived off from the spirits brands," he added.
At Jefferies, analysts said they are becoming "more constructive on spirits as we believe that reasons for current weakness are cyclical".
"Spirits have been through a boom and bust with the highs of the Covid super-cycle followed by a severe hangover. This has dented investor confidence in spirits' medium-term prospects. Spirits are cyclical; the trick is to buy them when they are out of favour and at trough earnings. Earnings then tend to return and shares re-rate," the broker remarked.
Jefferies has a 'neutral' rating on Diageo.
By Jeremy Cutler, Alliance News reporter
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