Nomura rules out M&A at Diageo but still sees upside

18th Sep 2014 11:21

Diageo's upcoming first-quarter results are expected to be weak and major M&A is unlikely, according to Nomura, though the broker said it still sees upside as it reiterated its 'buy' stance for the Guinness, Baileys and spirits group.Shares have performed well over the past week as hopes of industry consolidation lifted share prices across the beverages sector, following speculation that brewing giant AB InBev was working on a takeover bid for SABMiller.However, Nomura analyst Ian Shackleton said he has "rule[d] out any major M&A" at Diageo, including the potential sale of the company's beer business which he says is key for building the opportunitiy in the African spirits market.As for the first quarter results, due out on 16 October, the analyst estimates "weak reporting" with organic revenues down 3%, "impacted by several technical factors".Nevertheless, he expects a return to organic revenue growth with a strong focus on internal performance programmes. Strong performances in the emerging markets and improvements in the US and Europe should lead to overall revenues rising by around 3% in the year to June 2015.Organic earnings should also rise by 5% as the company's cost-cutting programme drives margins higher.Shackleton pointed out that Diageo's shares trade at 18.7 times estimated earnings for the 2014 calendar year, a discount to the average multiple of 21.5 across the spirits sector."Although short-term newsflow continues to look weak, we would look to accumulate the shares into any weakness as we see an improving dynamic during [the current financial year]."A 1,980p target price was maintained for the shares, which were up 0.9% at 1,829.03p by 11:36.