3% cut to FY26 adj EPS on more challenging US and China 2025 has been an even more challenging year than feared for Diageo, particularly in the US/NAm and China where Spirits demand remains very subdued. H1 FY26 results on 25 Feb will hopefully be a low-point for performance before the benefit of self-help cost measures and new commercial initiatives (RTDs, affordability, Guinness capacity) start to come through during 2026. With guidance for FY26 organic sales to be flat to slightly down and low-to-mid single digit organic EBIT growth (H2 weighted), we model -0.5% organic sales and +0.5% organic EBIT (margin +30bp) with +2% adj EPS to $1.67. We remain Buy but reduce our PT to £22.00 (37% upside) reflecting 3% lower EPS estimates and lower peer multiples. Divisional drivers – pages 3-4 Q1 organic sales were flat (NAm -2.7%, APAC -7.5%), but management expect worse to come in Q2 (GBYe -3.1%) as US shipments vs. depletions normalise. We now model H1 organic sales -1.7% (NAm -5.2%, APAC -7.2%) with -4.2% organic EBIT to $3,213m driving adj EPS -2% yoy to $0.96. For FY27E, we currently model +3.6% organic sales (NAm +1.6%) with +5.5% organic EBIT to $6,029m (margin +50bp) and +6.5% adj EPS to $1.78. Deleverage story unchanged, unchallenging valuation Shares are -37% ytd. On our new forecasts, DGE trades on 12.7x cal.26 P/E and 11.1x EV/EBITDA, a 10% P/E discount to European Beverages trading on 14.5x/8.5x respectively and the lowest absolute since 2011. Despite the external pressures, with greater emphasis on capex and working capital discipline, the target for at least $3bn FCF for FY26 should be achievable and on our estimates drive sequential 0.2x de-leverage to 3.3x (towards 2.8x by FY28E, excluding incremental disposals, e.g. India Cricket franchise).