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Analysts have offered a lukewarm reception to Diageo's performance in the last six months of 2019, warning that negative factors such as the coronavirus and an economic slowdown in India could impact the business in 2020.
Johnnie Walker's 'White Walker' tie-up with Game of Thrones contributed to a bumper year-prior for Diageo
Last week, the UK-headquartered group posted a 4% sales rise in the first half of fiscal-2020. The top-line performance is at the lower end of September forecasts and was impacted by decelerating growth in Asia-Pacific along with declines for flagship Scotch whisky brand Johnnie Walker.
In a subsequent note to clients, Societe Generale analyst Jamie Norman said he expected to see market expectations for the company's sales growth "fall to the bottom of its target range from the top of it just six months ago". Norman added: "We think there is still further to go, despite Diageo's structurally-strong long-term attributes.
"We have been concerned that Diageo might already have seen 'peak Scotch', that its India momentum could slow, that higher A&P was required to sustain momentum in the critical US business, and that cyclical/extraneous risks were inadequately reflected in consensus expectations or the shares' valuation."
At Jefferies, meanwhile, Ed Munday offered a more positive assessment of a "more normalised growth outlook" after three years of strong sales rises, pointing out that Diageo "remains a well-run, diversified company that operates in a favourable industry". However, he highlighted the risk of continued volatility in emerging markets, along with a reduced contribution from innovation compared to fiscal-2019, when Johnnie Walker's tie-up with the Game of Thrones franchise proved highly lucrative.
Furthermore, the coronavirus outbreak in China offered "potential downside risk to guidance", coupled with macroeconomic volatility in India and Latin America, as well as in the Global Travel Retail channel.
On the coronavirus, Bernstein analyst Trevor Stirling estimated that it could have a -80bps impact on organic profit growth, based on the assumption that Diageo's China business could decline by about 50% in January to March, and by about 25% in April to June this year.
Diageo's key weaknesses derive from its operations in Asia, said Laurence Whyatt at Barclays, with travel retail impacted by unrest in Hong Kong and India suffering an economic slowdown - although the premium portfolio grew by 8% in the country, on a tough comparison.
"A number of uncertainties remain in fiscal-2020, the largest of which is likely to be the potential disruption from coronavirus," Whyatt added. "The US tariffs threat has largely passed, particularly for FY20."
He cited more positive trends for the company in the US, including continued growth for the Crown Royal brand as line extensions attract new consumers, and high double-digit gains for Diageo's Tequila roster.
Whyatt added: "Johnnie Walker faced tough comparisons in H1, but with the comparables easing in H2 and increased marketing spend around its 200-year anniversary, it should be able to improve during the year."
Sectors: Beer & cider, Company results
Companies: Crown Royal, Diageo, Johnnie Walker
