Broker snap: Citi expects soft quarter for Diageo

7th Oct 2013 10:33

Smirnoff and Captain Morgan owner Diageo was trading lower on Monday morning after Citigroup said it expects a 'soft quarter' for the spirits industry across the board. Nevertheless, the bank kept its 'buy' rating saying that growth should improve in the coming quarters and the company is the best positioned in the emerging markets (EM) for the long-term."Over the next 12 months we expect the stock to re-rate by just over a price-to-earnings [multiple] point to 18.5x, in line with the average of ABI and SABMiller, as investors appreciate: (a) Diageo's defensive qualities; and (b) the excellent emerging markets (EM) growth opportunity."The bank forecasts 3.4% growth in organic sales in Diageo's fiscal first quarter.North America is expected to be "quite light" (growth estimated to be +3.0%), as around £10-12m of Ciroc vodka sales pre-shipped in the fourth quarter will unwind. Sales growth in Latin America (+9.0%) should be inflated by high pricing in Venezuela, but Citi expects underlying trends to be soft, particularly in Brazil and Colombia. The Africa, Eastern Europe and Turkey region should be weaker than usual (+6.0%), due to Nigeria and very difficult comparatives in Turkey and Eastern Europe. Asia Pacific is forecast to grow 2.0% while Western Europe is estimated to fall 1.0% on an easy comparison. "We expect first quarter to be weak, as we said, but on easier EM comps growth should improve in the coming quarters (we estimate sales +4.8% growth for the full year). In our view Diageo is best positioned in EMs for the long term and the group's diversification provides a good hedge short term."The stock was down 0.62% at 1,936.5p in mid-morning trade, well below Citi's target price of 2,320p.BC