31st Jul 2015 11:57
LONDON (Alliance News) - Berenberg retains its Buy recommendation and GBP2,350 pence price target on Diageo, saying that after a "painful" 18 months of adjustment targeted at improving the drinks giant's commercial execution and route to market, the time has come to "start seeing the fruits of such work".
On Thursday, Diageo reported a rise in profit in its recently-ended financial year, although net sales were hit by currency headwinds, but it increased its dividend beyond expectations saying it will deliver an improved top-line performance in the new financial year.
The FTSE 100-listed drinks giant reported a pretax profit in the year ended June 30 of GBP2.93 billion, up from the GBP2.71 billion it reported the year before, as revenue grew to GBP16 billion from GBP14 billion and net sales grew to GBP10.81 billion from GBP10.26 billion.
Berenberg says that Diageo's commitment to a stronger top-line growth is positive and notes that it will be key in the financial year 2016. On an underlying basis, Berenberg increases its expectations for top-line growth for the new year in the US to 3.5%, from 1.5%, as it becomes more confident about the growth that Diageo's depletions show in the US.
However, it notes that this is offset by negative foreign exchange movements and lowers its earnings per share estimate for the full year by 1.4%.
"The improvement in cash generation that precedes an inflection point in sales growth as the focus changes to sellout has now mostly materialised. The organisation should now benefit from an improved execution platform and any increase in sales growth from here is likely to come with an improved cash conversion rate compared to historical levels," the broker says.
Barclays agrees that confidence is building for Diageo and is positive of the increased dividend and GBP500 million three-year cost-saving programme.
"Diageo still has a lot to do to realise its ambitions and convince doubters it is worth a premium rating, however, give its firmer footing, now conservative expectations and on-going optionality around possible non-core disposals, we believe the stock can gently outperform from here," Barclays says.
Barclays has an unchanged Overweight rating on Diageo, with a 2,000 price target, down from 2,075 pence previously.
Shares in Diageo are trading down 1% at 1,793.63 pence Friday afternoon.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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