Diageo’s share price soars as it reveals future ambitions

Diageo’s share price shot up by almost 2.5% to more than £39 today as it hosted its Capital Markets Day, the event at which the company briefs the investment community on its progress and ambitions.

It threw down the gauntlet to its global competitors by issuing new medium-term guidance ahead of its historical growth rate, saying that it expecting organic net sales growth in a range of 5% to 7% and organic operating profit growth in a range of 6% to 9% for its financial years fiscal 23 to fiscal 25.

The company also said it was targeting a 50% increase in its share of the total beverage alcohol (TBA) market by value share, from 4% in 2020 to 6% by 2030. While much of that growth will beachieved via premiumisation, it also implies a large increase in volumes where Diageo holds about 3% of the world market.

When the company announces its results for the present six months to the end of December it expects them to show strong organic net sales growth of at least 16% (compared with the Covid-depressed period in 2020) and organic operating profit growth ahead of organic net sales growth.That implies a strong upward trend in margins.

Given that most of the half year is already over and the selling for the festive season largely complete, investors took a more bullish view, believing that Diageo will eclipse those figures, hence the share price surge to record highs above £39.

By comparison, at New Year 2020 they stood at just above £30 and slumped to £28 as the pandemic struck.
Ivan Menezes, the Chief Executive said: “Since our last Capital Markets Day, we have continued to invest in our brands, sharpened our focus on accelerating growth and quickly responded to shifts in consumer behaviour.

“We have also launched ‘Society 2030: Spirit of Progress’, our 10-year sustainability action plan, building on our strong track record of doing business the right way, from grain to glass.
“Our culture of everyday efficiency is embedded in our business and we continue to challenge ourselves to achieve more. In fiscal 21, despite the challenges created by Covid-19, we delivered strong organic net sales growth, drove an improvement in organic operating margin and delivered strong cash flows, while continuing to invest in long-term sustainable growth.

“We believe our sales growth trajectory has accelerated, underpinned by the strength of our advantaged position across geographies, categories and price tiers. Total Beverage Alcohol (TBA) is a large, growing and attractive sector of which Diageo currently has a 4% value share.

“With continued investment in marketing, digital capabilities and our people, we have significant headroom for growth. This gives us the confidence that we can grow Diageo’s value share of TBA from 4% in 2020  to 6% by 2030.”

Lavanya Chandrashekar, the Chief Financial Officer, said: ”Our focus on everyday efficiency enables us to continue to increase investment in our brands and strategic growth initiatives, while underpinning organic operating margin improvement.

“This self-sustaining growth model gives us confidence that we can accelerate our organic net sales growth within a range of 5% to 7% for fiscal 23 to fiscal 25. This compares to growth of 4% to 6% in fiscal 2017 to fiscal 2019.

“While we expect inflationary pressures to increase, we also expect to benefit from operating leverage, premiumisation, revenue growth management and productivity gains. As a result, we expect organic operating profit to grow sustainably in a range of 6% to 9% for fiscal 23 to fiscal 25.

“We have made a strong start to fiscal 22 [which began in July]. We are delivering organic net sales growth across all regions, as we benefit from resilience in the off-trade and continued recovery in the on-trade. This is benefitting organic operating margin, despite rising inflationary pressures, which are partly due to supply chain constraints.

“We expect organic net sales growth of at least 16% in the first half of fiscal 22 and organic operating profit growth ahead of organic net sales growth. We expect the strong growth momentum in the first half of fiscal 22 to continue through the remainder of the fiscal year.”

She warned, however, that in second half of fiscal 22 [January to June 2022] “we will be lapping a tougher comparator”, meaning that the results will be compared with those in the first half of this year when the drinks sector emerged strongly from the effects of the coronavirus.