Diageo PLC (LSE:DGE) had its forecasts and share price target cut by Barclays as it faces volatility in China and some Americas consumers changing their buying habits due to inflation, said Barclays, as well as a recovery in sterling.
Interim results next month likely to see a big focus on the impact of inflation on consumer demand for its products, which include Bailey’s, Tanqueray, Johnnie Walker, Don Julio and Captain Morgan.
In the Americas, the FTSE 100-listed company has “yet to see any downtrading from consumers”, the bank’s analysts noted, but it has been revealed that in “some consumers” in “isolated areas” have switched to smaller pack sizes in order to keep buying their preferred alcohol brands.
But growth is expected to remain “resilient”, the bank said, as its strong exposure to the premium end of the alcoholic drinks market continues to outperform, further aided by strong summer trading and a “relatively easy” comparison with an Omicron-hit period a year earlier.
First-half organic net sales growth (OSG) is forecast by Barclays to be 9.4%, with organic price growth (OPG) of 10%.
Diageo chief executive Ivan Menezes said in October the group had “made a good start” and was “well-positioned” to deliver its medium-term guidance for the next three years of OSG in the range of 5% to 7% and organic operating profit growth in the range of 6% to 9%.
“Whilst China lockdowns continue to be volatile, we expect broad-based strength in Asia from India and South East Asia,” Barclays analysts said.
“Growth should be supported by Latin America, as the region’s consumer looks to be relatively less impacted by inflationary pressures.”
Inflation impact on demand is expected to be most interest in Europe and Africa, the analysts said, though Diageo has highlighted that trading in southern Europe was strong, driven by both an on-trade recovery as well as a return of tourism.
Trading in the UK was less robust while the consumer environment has also got tougher in Nigeria.
Europe OSG is forecast at 4.5% and Africa at 8.0%, while North America is seen growing 8.5% and Latin American and Caribbean at 14.0%.
While China has been volatile, the Scotch category has been less impacted given its skew to at-home consumption, while the premium end of the India market remains strong and South East Asia has benefit from a return of tourism, combining to lead to a forecast of Asia Pacific OSG of 15%.
Barclays cut its forecasts to reflect updated company commentary, with organic estimates ticking up slightly but our the price target decreasing 7.7% to 5,010p as FX forecasts are updated to reflect recent sterling strength.