Big brands recover. The top-line acceleration in FY19 was driven by Scotch (especially Johnnie Walker), US Spirits (especially tequila and Canadian whiskey) and Emerging Market Spirits (especially LatAm and Africa). Smirnoff (+3%) appears to have turned the corner at last. The Global Giants brands in aggregate are growing 5%, an improvement of c. 100bps on the previous growth rate – which is impressive given the size of these brands. The high-end Reserve brands slowed, but Global Giants and Local Stars brands more than offset this.
Capital allocation plans revealed. Management announced a 3-year £4.5bn share buyback programme. We assume this is implemented evenly over the period. The net debt/EBITDA target of 2.5-3.0x leaves some room for further bolt-on M&A, which management touched on in the post-results analyst meeting; high-end brands with plenty of growth potential are the priority, with the rum category mentioned as one example. An investment in cannabis is still being considered, but management believes there is no need to rush into the category.
Investment view. We raise our target price in acknowledgement of the solid and broad-based delivery in FY19 as well as the modest positive revision to our estimates. Our 3100p target (previously 2950p) is based on a CY20E PE of 22x, and implies a forecast total return of -8.0%. We note our DCF still shows significant (over 25%) downside. The valuation remains extended and well above the historic average. The risk is that EMs could become more volatile and/or the US could impose tariffs on European imported spirits. We maintain our Sell on valuation grounds.
