Halfway figures from Diageo are, on the face of it, not terribly good. Volumes, the amount of booze sold, are down by 3 per cent, actual revenues by 5 per cent and operating profits by 3 per cent in the six months to the end of December. This caps a difficult couple of years since Paul Walsh, the former chief executive, left.
Diageo has been hit by the curb on giving spirits as gifts in China, the general slowdown in emerging markets and disappointing trading in North America, a third of the total. Here, the hit has been on two fronts. A move to more “authentic” spirits hit sales of its mid-market brands, including Smirnoff and Johnnie Walker. Meanwhile, a price war in vodka and rum meant an assault from the cheaper end of the market.
Sales in the US, on a strictly comparable basis, were down by 2 per cent, a figure well signposted to the market. Deirdre Mahlan, the former chief financial officer, has been shipped across to turn around the US operation and analysts are primed to see sales bounce by 8.5 per cent in the second half.
This sharp turnaround, in the most important market, is down to three things: Smirnoff has been re-priced to make it more competitive; the second half of the last financial year was an especially difficult one, with sales down 3 per cent; and Diageo is switching to a so-called “replenishment” model for new brand launches, which means delivering what it believes the market will take rather than over-supplying.
Across the group, directly comparable volumes were up by 1 per cent and sales by 1.8 per cent as some price rises were achieved in Europe and Latin America. The difference between this and the published figure is swings in currencies and the effects of disposals as Ivan Menezes, Mr Walsh’s successor, refines the portfolio after an earlier, somewhat scattergun approach to acquisitions.
Foreign exchange will become less of a factor in the second half and Diageo is reducing its estimate for the full-year hit to profits from £150 million to £85 million.
The shares lost 25½p to £18.41½ . They have recovered sharply since last August and now sell on 21 times earnings. That price would seem to reflect most of the recovery.
Revenue £5.6bn Dividend 22.6p
MY ADVICE Avoid for now
WHY Attempts to turn around the US business are plainly working, but most of that improvement already seems to be in the price
Pretty well everything seems to be running against ITE Group and little of it is the exhibitions organiser’s fault. It gets 40 per cent of profits from Russia and is suffering a double hit of depressed domestic demand and the lower value of the rouble, which erodes reported profits.
It gets another 10 per cent from the oil-rich states of Kazakhstan and Azerbaijan, which are understandably not as rich as they were. The rising tension between Russia and Turkey will not help business in the latter country. Against those negatives, ITE has been buying in areas such as India and China, where the apparent stalling in economic growth has not had much effect on customers who are still keen to exhibit their goods. The stronger euro is another positive.
In the three months to December 31, the first quarter of the financial year, revenues were therefore down by 13 per cent year on year. Contracted revenues of £86 million are about where they were a year ago, but this is down to a £13 million contribution from those acquisitions.
The shares added 4¼p to 142¼p, mainly on relief that the picture was not worse. They sell on 13 times earnings, but this seems too early to buy.
13% fall in quarterly revenues
MY ADVICE Avoid for now
WHY There seems no obvious catalyst for improvement
3i is an easy investment to value in that, since a cost-cutting programme turned the private equity business around a couple of years ago, it has been investing and divesting successfully and its model suggests that will continue. It is difficult in that the level of dividends depends on the value of those investments sold, and this is inevitably lumpy and hard to forecast.
The company does its best to help out and has indicated total payments of at least 15p a share in the current year to March 31. This, given the divestments since, should comfortably be exceeded but at the current price, off 5¾p at 434p, only suggests a dividend yield of 3.5 per cent for this year.
This should not bother investors in the long term, though. The quarter was a successful one, despite talk of challenging markets, and for the first nine months divestments of £403 million comfortably outstripped purchases worth £364 million, with one big sale worth £188 million pushed into the fourth quarter.
This will mean 3i is ungeared and with plenty of scope to buy further as opportunities emerge. Earnings from companies in its portfolio rose by 18 per cent, including acquisitions — it is little exposed to problem areas such as emerging markets, oil and commodities.
The shares have tended to track the banks, which makes precious little sense but would seem to offer a buying opportunity. They were above 560p in the summer; the current price is within striking distance of the latest net asset figure of 413p a share. That fall looks overdone.
Net asset value per share 413p
MY ADVICE Buy
WHY Share price fall does not reflect value of the business
And finally...
Quarto Group is a publisher of non-fiction books that has seen an awful lot of activity on its share register in recent years. The company has issued a positive trading update suggesting that results for 2015 will exceed expectations, while it has a strong position in children’s books and foreign language publishing. All this suggests the turnaround phase is over. Good to see a book publisher doing well in this digital age, even if it is also down to the unfathomable attraction of adult colouring books.
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