Diageo PLC (LSE:DGE) revenue forecasts have been cut to reflect China's Covid lockdowns, said Credit Suisse, but it predicts sufficient positives to offset this.
The bank trimmed our second-half and full-year group organic revenue growth forecasts to 16.7 and 18.5% from 17.7% and 18.9% respectively to reflect the recent lockdowns, which impacted Diageo’s Baijiu subsidiary and has led to a deterioration of Scotch Whisky imports.
Diageo’s listed Baijiu subsidiary, Sichuan Swellfun, reported first-quarter results covering the FTSE 100 group's fiscal third quarter, with sales growth slowing to 14% from 88% in the prior six months.
Diageo chief executive Ivan Menezes at the time of first-half results alluded to Chinese New Year as "solid, but not exuberant", with lockdowns impacting banqueting and gifting.
Lockdowns have only intensified since.
The long-term story remains "intact", said the analysts, with Greater China accounting for 5% of sales, up from 2% in the 2015 financial year, and management expect them to grow to 10% over time.
"We forecast 15-20% medium term organic growth, driven by a long runway ahead for premiumisation of the Baijiu category, and outperformance of the Whisky category supporting International Spirits penetration."
On valuation, the analysts said the shares trade for around 22 calendarised 2023 earnings, a 25% discount to peers in the spirits sector, which is in line with the historical average.
A 4,700p price target compares to a last close just under 3,900p.