Diageo’s Asia hangover

Diageo will report its first-half figures on Thursday 29 January, as weak sales in Asia continue to leave a sour taste in the company’s mouth.

Diageo logo
Source: Bloomberg

Sales of Diageo’s products across its Western markets are broadly stagnant, while the real pain is being felt in Asia. The decision by Beijing to cut back on luxury spending has had a severe impact on Diageo’s Asian division.

In 2012, the London-headquartered company paid £250 million for a 40% stake in the Shui Jing Fang brand, and last year sales of the spirit plummeted by nearly 80% on the back of the spending crackdown. Diageo derives nearly 30% of its revenue from scotch, and sales of Johnnie Walker Black Label declined by 28% in China last year. The latest growth figures from Beijing confirmed that the second largest economy in the world is slowing down, and these trends of Diageo drink sales are not likely to be reversed. There was some moderate growth in Indonesia in the first quarter, but sales in the Asian division declined by 7.4% during the period, where analysts were anticipating a drop of 4.5%.

North America is Diageo’s biggest market, and the division eked out a 0.1% rise in revenue for the first three months of the year. Europe registered a 1.4% drop in revenue over the same period. As Chris Beauchamp stated, SABMiller is encountering similar problems.

Diageo’s CEO and CFO have taken pay cuts to the combined tune of more than £4 million to offset falling profits. The move was also designed to keep shareholders happy, which was the catalyst behind the decision.

The company will reveal its first-half results on Thursday 29 January, and traders are anticipating revenue and adjusted net profit of £5.95 billion and £1.54 billion respectively. Diageo will report its full-year figures in July, and the consensus is for revenue of £11.01 billion and adjusted net profit of £2.37 billion. These forecasts equate to a 7.4% rise in revenue and a 2% decline in adjusted net profits.

Equity analysts are bullish on Diageo, and out of the 34 recommendations, 10 are buys, 18 are holds and six are sells. The average target price is £18.83, which is 2.7% below the current price. Investment banks are also bullish on SABMiller. Out of the 36 ratings, 10 are buys, 19 are holds and seven are sells. The average target price is £35.95, which is 3% above the current price.

Over the past two months the stock has been stuck in the £18-£20 range. The share price ran out of steam when it approached £20 on Monday and today it has punctured the 50-hour moving average of £19.40. A move through £19 will bring downside support at £18 into play. If £20 is cleared then the record high of £21.52 will be the target. 

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