Diageo shares slide as emerging market business pulls back

31st January 2014

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A market update “in-line with expectations” from international spirits maker and brewer Diageo has split brokers as emerging market business slows writes Philip Scott.

Following the publication of its half-year results on Thursday shares in the firm, which counts Guinness and Smirnoff among its brands, saw its shares drop 5% on the day – over six months they are off by 9%.

But Citigroup has come out in support, re-iterating a ‘buy’ recommendation on the shares this week while both brokers at Liberum Capital and Canaccord Genuity repeated their respective ‘hold’ positions.

In its report, Diageo showed that while good progress was made in the important North American market, Western Europe remained weak and a sharp slowdown has been witnessed in many emerging markets.

Overall net sales for the FTSE 100 listed firm increased by 2% on an organic constant currency basis to £5,9bnm. Adjusted operating profit was up by 3% on the same basis to more than £2bn.

North America operating profit was up by 8% on an organic basis to £851m, with net sales up by 5% to £1.9bn. Volumes were down by 2% but this was more than offset by price increases and improved mix. Net sales growth was driven by reserve brands, Johnnie Walker, Captain Morgan and Crown Royal. Smirnoff net sales declined, reflecting increased discounting in the vodka segment.

Across the Africa, Eastern Europe and Turkey regions operating profit was down by 4%, as was the case for the Asia Pacific.

Sam Hart, analyst at broker Charles Stanley says: “Diageo released a solid set of interim results, which were within the range of market expectations.

“Unfavourable exchange rate movements created an additional headwind. A restructuring programme has been announced, with £200m of annual savings targeted by 2016/17. We make a moderate downgrade to our earnings per share estimate for 2013/14, but think long-term fundamentals remain attractive and maintain the recommendation at ‘accumulate’.”

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