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Diageo toasts improved trading

by LLB Editor
28th Sep 20 11:05 am

Diageo’s trading update is remarkably upbeat and shows good progress in getting operations back on track.

Demand is returning from many important places, albeit some areas are likely to remain fragile near-term such as sales in airports and in emerging markets.

“Like many businesses around the world, Diageo’s earnings are not going to suddenly recover to pre-pandemic levels. While alcohol sales for the at-home market may have been resilient throughout the crisis, the company still derives a large chunk of its earnings from bars, pubs, hotels and restaurants,” said AJ Bell’s Russ Mould.

“These outlets continue to be susceptible to disrupted and depressed trading which might explain why analysts are not forecasting any sales growth for Diageo in the current financial year, ending June 2021.

“In the previous financial year sales fell by 8.7% from £12.9 billion to £11.8 billion. The consensus forecast for this year is the same level of revenue, rising to £12.5 billion in 2022. That means Diageo may have to wait until 2023 before its sales have managed to surpass the pre-pandemic level at circa £13 billion.

“Its job is to now focus on strongest areas and try to fuel positive sales momentum while waiting for the weaker markets to stabilise.

“Among the most encouraging areas is the US where performance is ahead of expectations, helped in part by the spirits category doing well. That vindicates the company’s ongoing willingness to invest in the spirits market, as illustrated by Diageo making two seemingly pricey acquisitions in this market in recent years.

“Last month it bought Ryan Reynolds-backed Aviation American Gin on a 20-times sales multiple and in 2017 its acquisition of the George Clooney-backed Casamigos super-premium tequila brand was also thought to have been done on a similarly high sales multiple.”

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