Diageo (DGE.L) will report its Interim results (to end December) on 25 January. We look for revenues of £6.6bn, EBIT of £2.2bn and Adj. EPS of £0.66, with an Interim dividend of around 25p per share, representing mid/high single digit organic growth rates. At the FY-17 results last year, Diageo raised its guidance for the Operating margin to 175 bps (100 bps) for the three year period to June 2019, so we look for progress towards this target, which if achieved would represent an Operating margin of around 32%. Vodka was the only negative growth category last year, we look for an update.
At the full year results reported in July 2017, Diageo recorded positive growth across all its brand categories except Vodka, and positive growth in all geographic regions, as shown in the charts on page 2. A result not seen for many years. Historically, there have always been a number of categories or regions in decline, which held back the Group’s overall performance. Currently the business is firing on (almost) all cylinders which has driven the share price up to all time highs. We expect this positive momentum to have continued during H1-18, but we also look for any signs of weakness, especially in the key Scotch Whisky category.
Diageo manufactures the majority of its high margin alcoholic beverage products in the UK or Ireland, and thus Sterling’s sharp devaluation last year made DGE’s products more competitive on the world stage. The chart on page three highlights the extent of these FX gains during FY-17 (to June 2017), and as such, this impact will be much lower in FY-18, but we expect the key organic growth rate to have remained strong in mid-single digits.
Diageo’s highly reliable and predictable cash flows justify a top quartile valuation amidst its peers, but currently it is trading at the top of the range, as shown in the peer group valuation chart on page 4. Such a premium valuation is likely to continue while growth in the global Scotch Whisky market remains strong, but investors should keep an eye out for any weakness here. We maintain our Buy recommendation, but note that the share price is fully up with our target price of 2600p, thus put this under review (UR) ahead of the forthcoming results.