Diageo’s management is “continuing to pull the right levers” as demonstrated in its portfolio updates and “Route to Consumer” (RtC) programme however there is no near term catalyst for transformational growth in India and Africa, a leading analyst has said.

Wyn Ellis of Numis said that medium term prospects are “very encouraging” for the drinks company as it benefits from the continued strength of the US dollar and has issued a Hold recommendation and a target price of 1800p.

Ellis said: “We believe medium term prospects are very encouraging, and that eventually progress in Africa and India will be transformational for the Group, with Diageo trading on an estimated FY15 (June) PE of 19.1x, it is difficult to see a near term catalyst.”

“Diageo is to acquire the 50% of Tequila Don Julio which it did not already own. This strengthens its position in tequila and in Mexico. The deal is being facilitated through the sale of Bushmills and will result in a net inflow of $408m to Diageo in early 2015. Diageo guides to economic profit break-even in year three, assuming a WACC of 9%, and “completion of the transaction in early calendar 2015 and the use of the net proceeds to reduce debt at Diageo’s average rate of interest, the transaction will dilute EPS by 0.6% in the year ending 30 June 2015.”

Ellis said of the programme: “The aim of the RtC initiative is to generate a structural advantage by enabling the sales force to call profitably on more outlets, and smaller outlets than competitors, in order to generate sustainable and improving returns for Diageo and its distributors. The RtC objective is one of three which together determine each General Manager’s annual bonus.

The first full year of delivery in an individual market is targeted to be margin neutral at worst, with enhancement thereafter. To date management is encouraged by the tangible benefits delivered. Logistics costs savings, for example, feature heavily in the £200m pa cost savings target (by FY17) announced in January and management says it has identified almost 90% of the savings.

“The programme is also helping, inter alia, to drive profitable sales growth (in wave 1 territories the number of outlets served via dedicated coverage increased by c.a third) and reduce inventory levels. As the programme progresses more opportunities are being identified and management sees a “significant and increasing top-line impact.”

 

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