DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 6 April 2017 Europe/United Kingdom Equity Research Beer & Alcoholic Beverages Diageo (DGE.L) The Ideas Engine series showcases Credit Suisse’s unique insights and investment ideas. Rating OUTPERFORM Price (04 Apr 17, p) 2286.50 Target price (p) (from 2430.00) 2500.00 Market Cap (£ m) 57,555.9 Enterprise value (£ m) 75,919.6 Target price is for 12 months. Research Analysts Sanjeet Aujla 44 20 7888 0353 [email protected]Alexander Evans 44 20 7888 1595 [email protected]HOLT Sector Specialist: Nadia Panagou 44 20 7888 3609 [email protected]HOLT Sector Specialist: Steffen Spillecke 44 20 7883 6549 [email protected]INCREASE TARGET PRICE Improving returns led by Scotch & India ■ In this Ideas Engine report, we assess Diageo’s returns at a segment level through detailed analysis of its subsidiary accounts and those of its listed/non- listed peers, leveraging our proprietary CS HOLT® framework. ■ Focus on returns: We forecast an inflection point in returns after a three-year decline (and c30% share price underperformance), led by the faster-growth Scotch and India operations, where barriers to entry are the highest. Beer has the lowest returns and continues to underperform. With a new chairman at the helm, we think it could be an opportune time to review beer’s role in the portfolio to realise value. We adjust our TP to £25 (from £24.30) on FX and adjustments for associates/minority interests. Our Blue Sky valuation, which assumes a hypothetical beer disposal and spirits re-rating, increases to £32. ■ Scotch returns at an inflection point: Diageo’s Scotch returns should accelerate as demand improves, investment requirements in capacity and maturing stock ease after a significant step-up over the past decade, and on FX tailwinds. We estimate DGE's Scotch inventory now represents c10 years of demand vs c8.5 for the rest of the industry, an important competitive advantage that positions it well to capitalise on future growth. ■ India returns should benefit from a more asset-light approach: Diageo India generates a c11% CFROI®, significantly below that of Pernod, at c50%. However, we see scope for improvement through accelerating the franchising of its lower-margin ‘popular’ brands, which is profit accretive and reduces working capital and plant network whilst freeing up resources to invest in the higher-margin 'prestige+' portfolio. ■ Scope to realise value from a beer disposal: As spirits returns improve, it challenges the strategic necessity to retain a structurally lower-return beer business that we believe would be worth more to a fully focused brewer than currently valued within Diageo. This could draw more attention to the valuation of the standalone Spirits business, which has solid growth prospects, high returns and barriers to entry, and improving cash conversion. Figure 1: Returns improvement in key growth engines, Scotch and India Source: Credit Suisse estimates, Credit Suisse HOLT (dotted line shows Diageo group average) Scotch Vodka North American Whisky Other spirits India Beer RTDs Scotch 2020e India 2020e 0% 2% 4% 6% 8% 10% 10% 15% 20% 25% 30% 35% 40% 45% Medium term organic growth CFROI
Transcript
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
6 April 2017 Europe/United Kingdom
Equity Research Beer & Alcoholic Beverages
Diageo (DGE.L) The Ideas Engine series showcases Credit Suisse’s unique
insights and investment ideas.
Rating OUTPERFORM Price (04 Apr 17, p) 2286.50 Target price (p) (from 2430.00) 2500.00 Market Cap (£ m) 57,555.9 Enterprise value (£ m) 75,919.6 Target price is for 12 months.
EBIT 3,008 3,625 3,994 4,283 Net interest (305) (319) (282) (243) Cash taxes paid (507) (748) (844) (929) Change in working capital (53) (121) (134) (159) Other cash and non-cash items 405 521 580 626 Cash flow from operations 2,548 2,959 3,314 3,576 CAPEX (506) (628) (626) (624) Free cashflow to the firm 1,996 2,262 2,606 2,851 Acquisitions (36) 0 0 0 Divestments 1,119 50 50 50 Other investment/(outflows) 0 0 0 0 Cash flow from investments 577 (578) (576) (574) Net share issue/(repurchase) 0 (50) (5) (5) Dividends paid (1,544) (1,631) (1,736) (1,874) Issuance (retirement) of debt - - - - Cashflow from financing (1,544) (1,681) (1,741) (1,879) Changes in net cash/debt 232 997 1,123 1,237 Net debt at start 8,635 8,403 7,405 6,282 Change in net debt (232) (997) (1,123) (1,237) Net debt at end 8,403 7,405 6,282 5,045
Balance sheet (£ m) 6/16A 6/17E 6/18E 6/19E
Assets Total current assets 8,852 9,205 9,431 9,680 Total assets 28,491 29,052 29,466 29,886 Liabilities Total current liabilities 6,187 6,419 6,510 6,600 Total liabilities 18,311 18,101 17,135 16,041 Total equity and liabilities 28,491 29,052 29,466 29,886
Net debt/equity (%) 82.5 67.6 50.9 36.4 Net debt to EBITDA (x) 2.5 1.8 1.4 1.1 Interest coverage ratio (x) 9.2 9.7 13.0 16.0
Company Background
Diageo plc is the world’s largest producer of spirits and a major producer of beer. A selection of their brands includes Smirnoff, Johnnie Walker, Baileys and Guinness.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (p) (from 2900.00) 3200.00
We assume Diageo i) improves its US execution and starts to gain market share ii) begins to grow by double digits in India following portoflio re-launch iii) delivers an extra 100bps of organic margin expansion over the next three years iv) sells its beer business v) re-rating of core spirits business to best-in-class peers.
Our Grey Sky Scenario (p) 1800.00
We assume i) its US business deteriorates given weak category exposure and under-indexation to brown spirits ii) the company re-invests all of its net productivity savings back into the business iii) the stock de-rates to trade at a c10% discount to European consumer staples.
Share price performance
The price relative chart measures performance against the FTSE ALL SHARE
INDEX which closed at 3990.3 on 04/04/17
On 04/04/17 the spot exchange rate was £.86/Eu 1.- Eu.94/US$1
Diageo discloses net sales and marketing spend by category - we use a combination of subsidiary accounts, historical disclosures and our own estimates to derive a gross profit and EBIT breakdown as well as an asset and working capital allocation by category
20% 22%
15% 14%
11%
0%
10%
20%
30%
DiageoGroup
Spirits RTDs Beer India
41% 39%
18% 17% 15%
14%11%
Diageo Group 20%
0%
10%
20%
30%
40%
50%
Vodka NorthAmericanWhisky
OtherSpirits
Scotch RTDs Beer India
6 April 2017
Diageo (DGE.L) 9
Scotch and India drive an inflection point in group returns
At the FY16 results last July, CEO Ivan Menezes highlighted Scotch, India and the US as
Diageo's strategic priorities for FY17, which are also the main topics for the company's
upcoming Capital Markets Day on 9 May.
Investors might be underwhelmed to learn that the returns generated by Scotch and India
are below the group average. However, our analysis shows significant improvement
potential over the next few years for both businesses, which drives an inflection in
Diageo's group CFROI back up to the mid-20%s level over the next few years. Importantly,
these two businesses generate faster growth and have relatively high barriers to entry.
Figure 17: We expect returns in Scotch and India to improve over the next few years, where barriers to entry
are the highest
Diageo segmental CFROI breakdown between gross cashflow margin and asset efficiency (note bubble size represents CFROI %)
Pernod has noted increasing price aggression in the Scotch industry – this was evident in
FY16, particularly in travel retail (c20% of Pernod's Scotch sales) as a result of a stronger
US dollar. However, this has broadened in FY17, since the sterling devaluation. The price
aggressors are broad based. However, this does not come as a big surprise – we note
comments from Diageo CEO Ivan Menezes at the company's H1 results in Jan 2017:
“We are making some price adjustments in a few markets. I don't expect it to be major. As
we look forward, I don't expect a major correction on scotch pricing or margins happening.
They'll be more tactical and market-specific where we are out of line. Overall, I'd say the
health of the brands and the underlying momentum gives me confidence that we can
continue building quality, volume and topline at current pricing levels"
We do not believe these price adjustments to have a significant impact, and note that
ultimately local managers are incentivised on organic growth – we note such pricing
adjustments (e.g. in France and Thailand in the 1990s) have had a disproportionate
benefit to volume growth.
Furthermore, the Scotch industry is much more consolidated today following industry M&A
over the past three decades – we note Diageo and Pernod have a combined c60% market
share, with the top 5 players accounting for c80%. We estimate the Scotch industry HHI
(Herfindahl-Hirschman Index), a measure of industry concentration, has increased to 0.23
in 2015 (defined as a concentrated industry) versus 0.13 in 2003 (a moderately
concentrated industry).
Figure 43: Diageo's Scotch price/mix remains
robust
Figure 44: Johnnie Walker's price/mix is positive in
all regions
Diageo Scotch portfolio and Johnnie Walker brand price/mix - % Johnnie Walker price/mix by region - %
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
Figure 45: We expect the industry to be more
rational than in the past as it is more concentrated
Figure 46: Scotch industry capacity utilisation is
also at much higher levels than the past
Scotch industry Herfindahl-Hirschman Index - (0-0.10 – a competitive market, 0.10-0.18 – moderately concentrated; >0.18- a concentrated market, 1 – a monopoly)
Scotch industry capacity utilisation - %
Source: Company data, SWIR, Credit Suisse research Source: Company data, SWIR, Credit Suisse research
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2013 2014 2015 2016 H1 17
Scotch Johnnie Walker
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
North America Europe Africa LatAm &
Caribbean
Asia-Pac
2015 2016 H1 17
0.00
0.05
0.10
0.15
0.20
0.25
2003 2015
40%
50%
60%
70%
80%
90%
100%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
E
2019
E
6 April 2017
Diageo (DGE.L) 18
Brexit implications
According to the Scotch Whisky Association, the industry should not incur tariffs on
exports to the EU, and should continue to benefit from existing zero tariffs in the US,
Canada and Mexico. However, the industry will lose access to EU Free Trade Agreements
(FTAs) – without transitional agreements, this could have negative implications in key
markets such as Korea, South Africa, Colombia and Peru (c7% of global Scotch exports).
Ultimately, the impact depends on if/how quickly the UK government can negotiate its own
FTAs with these markets, which could take time.
However, as highlighted by CEO Ivan Menezes in a recent interview with the FT (27
March) one positive is that it may be easier for the UK than the EU to negotiate an FTA
with India (which would be pivotal, in our view), as the Indian government has been
somewhat reluctant to engage in talks given the protectionism around the EU auto
industry.
Scotch investments should now moderate
Significant investments over the past decade
Between 1990 and 2005, Scotch industry capacity was relatively unchanged, given
overproduction and excess supply situations of the early 1980s and 1990s
However, Scotch industry capacity has increased by more than 40% over the past decade,
which has in turn led to a significant uplift in production as the industry became more
upbeat on long-term prospects for demand, buoyed by emerging market growth.
This has coincided with a period full of external shocks, first in Europe following the
financial crisis and more recently in emerging markets. As such, this increase in
production during a period of weak demand has increased Scotch industry maturing
stocks, also up c40% over the past decade.
Whereas a few years ago Scotch inventories were tight, equivalent to seven years of
demand in 2006/07, and therefore would struggle to meet future demand, the recent
slowdown and therefore inventory build places the industry in good shape to take
advantage of future growth, with inventory now equivalent to nine years of demand.
Figure 47: Scotch industry capacity has increased
by c40% in the past decade
Figure 48: This facilitated a large pick-up in industry
production
Scotch industry capacity – million litres of pure alcohol (LPA) Scotch industry production versus capacity – m LPA
Source: SWIR, SWA, Credit Suisse research Source: SWIR, SWA, Credit Suisse research
0
100
200
300
400
500
600
700
800
Malt Grain
200
300
400
500
600
700
800
Production Capacity
6 April 2017
Diageo (DGE.L) 19
Figure 49: The increase in production has coincided
with a period of weaker-than-expected demand
Figure 50: The result is that Scotch industry
maturing stock has also increased by c40% in the
past decade
Scotch industry production versus consumption (including evaporation) – m LPA
Scotch industry maturing stock – m LPA
Source: SWIR, SWA, Credit Suisse research Source: SWIR, SWA, Credit Suisse research
Figure 51: The ratio of Scotch industry maturing stock to current demand has
increased to c9 years
Ratio of Scotch industry maturing stock to consumption - x
Source: SWIR, SWA, Credit Suisse estimates
Older-aged maturing stock should improve from 2016/17
Whilst overall maturing stock has increased significantly over the past decade, one issue
the industry has been contending with is the decline in older-aged stocks – as shown in
Figure 52, we estimate the inventory of 12yr+ old Scotch declined by c30% between 2010
and 2015, a function of strong demand for older-aged stocks in recent years, the cut in
industry production in 1997-2001 and a cautious approach until 2005. However, we expect
the situation to improve over the coming years, driven by:
■ Increased production to now feed through: We note the 8-11yr old malt stocks
increased by a 15% CAGR during 2010-15, benefiting from the step-up in production
since 2005 ahead of consumption. This should feed through to improving 12yr+ stocks
from 2016/17.
■ The rise of non-age statements: The industry is increasingly moving towards 'no age
statement' products to better manage inventories. For example, Pernod has raised
prices recently on the Glenlivet 12-year-old, and introduced Founders' Reserve as a
non-aged variant at a lower price point, whilst Diageo has introduced Talisker Skye
following Storm and Port Ruighe in recent years.
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
6 April 2017
Diageo (DGE.L) 20
Figure 52: 12yr+ malt stocks have declined by c30%
in recent years, albeit the decline is starting to
moderate
Figure 53: The step-up in 8-11yr-old stocks from
increased production should start to feed through
to improve 12+yr stocks over the next few years
Change in 12yr+ Scotch inventory - % Scotch malt inventory by age – m LPA
Source: SWA, Credit Suisse research Source: SWA, Credit Suisse research
Diageo's Scotch investment requirements are starting to ease
As the Scotch industry leader, Diageo has led the increased industry investment over the
past decade. The company has almost doubled its malt production capacity over the
period, with c10m LPA of expansion within its existing distilleries and the construction of
the c11m LPA Roseisle distillery in 2009, its first in 30 years. Then in June 2012, Diageo
announced a five-year £1bn investment programme behind its Scotch business to meet
future demand, with c50% of the investment earmarked for capacity expansion in half the
existing sites, and the balance targeted for working capital investment in maturing stock.
Given industry weakness in the subsequent three years, Diageo has since slowed the
pace of expansion, including a moderation of production rates in some distilleries, and also
put on hold a new 13m LPA distillery in Teanenich, as it lowered its Scotch volume growth
assumption to 2-3% from 4-5%. We note the company disclosed that by June 2015,
c£800m of the targeted £1bn investment had been deployed.
We also note Diageo's Scotch capex almost halved in FY16 to in line with depreciation.
On the assumption that Diageo's Scotch production output is such that its maturing stock
investments grow in line with its medium-term volume growth assumption (CSe +3%), we
estimate Diageo's capacity utilisation is running at c80%, slightly above the industry
average, albeit below recent peaks – as such, we believe this level of relatively low capex
is sustainable over the next few years.
Figure 54: Diageo's malt production capacity has
increased by c80% over the past decade versus the
rest of the industry at +45%
Figure 55: Diageo is now starting to ease its Scotch
capex investments
Diageo malt distilling capacity versus rest of industry – LPA (m) Diageo Scotch capex versus depreciation (June year-end) - £m
Source: SWIR, Company data, Credit Suisse research Source: Company data, Credit Suisse research
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
2008 2009 2010 2011 2012 2013 2014 2015
Age 2009 2010 2011 2012 2013 2014 2015
8 58 57 63 81 93 99 117
9 55 56 55 61 83 92 98
10 59 52 54 54 64 83 86
11 68 55 50 52 52 62 75
8-11yr 240 220 222 248 291 336 377
12yr+ 317 309 289 267 246 229 217
63 63 82 84 86 86 99 99 110 110
171 191197 197 202 208
216 240243 248
0
50
100
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400
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Diageo Rest of Industry
0
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2012 2013 2014 2015 2016
Capex Depreciation
6 April 2017
Diageo (DGE.L) 21
Figure 56: We estimate Diageo's Scotch capacity utilisation is operating at
c80%, slightly higher than the rest of the industry
Diageo Scotch capacity utilisation versus rest of industry (2016E)
Source: Company data, SWIR, Credit Suisse estimates
Our analysis of Diageo's subsidiary accounts shows its Scotch maturing stock investments
have increased by a 9% CAGR over the past decade to £2.8bn in FY16. We estimate the
company now owns c40% of Scotch industry maturing stock, above its c36% current
volume market share. In other words, Diageo's maturing stock represents c10 years of its
current demand, versus 8.5 years for the rest of the industry, an important competitive
advantage in our view, placing it in good shape to take advantage of future growth.
As such, Diageo's growth in Scotch maturing stock investments is also starting to ease,
with growth moderating to c4% in FY16, the lowest increase in the past decade – we
expect normalised growth of c3% per annum going forward, in line with Diageo's medium-
term volume growth expectations.
Figure 57: Diageo has invested heavily in maturing
Scotch whisky stock since 2007 (c9% CAGR)
Figure 58: Diageo's share of Scotch industry
maturing stock exceeds its current market share
Diageo Scotch maturing stock investments (June year-end) - £m Diageo Scotch industry market share v inventory share (2016) - %
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
66%
68%
70%
72%
74%
76%
78%
80%
Diageo Rest of industry
36%
40%
33%
34%
35%
36%
37%
38%
39%
40%
41%
Market share Scotch inventory share
6 April 2017
Diageo (DGE.L) 22
Figure 59: Diageo's Scotch inventory levels are
equivalent to c10 years of demand versus 8.5 years
for peers, and therefore in good shape to take
advantage of future growth
Figure 60: Diageo is now able to moderate the pace
of Scotch maturing stock investments to grow in
line with volume growth (CSe +3%)
Scotch inventory in years of current demand - x Diageo Scotch organic volume versus maturing stock growth - %
Source: Company data, SWIR, Credit Suisse research Source: Company data, Credit Suisse research
Diageo's Scotch returns should now start to improve
To summarise, we see an inflection point in Diageo's Scotch returns with improving asset
turns and margins helped by;
■ An improvement in demand, led by a pick-up in volume growth in emerging markets
and improving mix in developed markets
■ FX tailwinds, both translational and transactional as most of the Scotch business’ costs
and assets are denominated in sterling
■ Easing capex and working capital investment requirements
We expect Diageo's Scotch returns to improve from current trough levels of c17% to c24%
over the next few years. Whilst returns would still be below the c25/26% levels achieved in
2012/13, this was partly inflated as the business was still in investment ramp-up mode.
Figure 61: We expect an inflection in Diageo's Scotch CFROI from FY17
Diageo Scotch CFROI - %
Source: Company data, Credit Suisse estimates, Credit Suisse HOLT
USL announced at its Q3 results in January 2017 that it had entered into 3-5-year agreements to franchise its lower-margin popular brands in Andhra Pradesh, Puducherry, Goa, Andaman and Nicobar from January 2017. The franchisees are responsible for the manufacturing and distribution of the brands in their respective states, and also take on the associated working capital.
In return, USL receives a fixed royalty fee per annum (not linked to volumes or revenues)
with a built-in increment, such that the franchisee bears significant operating leverage in its
business, which is a favourable arrangement considering these brands have been
declining in recent years.
USL's franchise fee is equivalent to c20% of FY16 net sales in these regions, which is
intended to be gross profit neutral. However, we expect it to be EBITDA accretive – whilst
most employees and marketing costs are focused on the prestige+ segment today and
therefore would change materially, there would be other variable costs such as transport
and fuel that would drop out.
47% 51%58%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2015 2016 9m 17
Prestige+ Popular
ABD
10%
Pernod
49%
USL
38%
Others
3%
12%
25%
0
5
10
15
20
25
30
DGE India Pernod Ricard India
1.0x
2.9x
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
DGE India Pernod Ricard India
6 April 2017
Diageo (DGE.L) 25
Furthermore, we believe the local franchisees will be able to better manage relationships
with state governments, which control pricing in c70% of the market – this could make it
easier to realise pricing in the market, where USL has sometimes found difficulties in the
past, which would in turn benefit the whole market.
Figure 67: USL has announced the franchising of its popular brands in select
states, which represents c13% of the total popular business
USL announced franchising impact (FY16) – Rs crore
Source: Company data, Credit Suisse research
The franchisee should be able to make an adequate return, given it will:
■ Be able to place more focus on these popular brands than USL, which is prioritising the
prestige+ segment;
■ Incur lower employee costs, as USL has to pay above minimum wages; and
■ Incur lower overheads as the business is across a small geography and focussing on
one segment of the market, and thus a simpler operation than USL.
USL has committed to maintaining strong quality controls to ensure the brand equities are
not affected by this move. Ultimately, this means USL's management can allocate more
time and resources to the more profitable prestige+ segment whilst realising attractive
returns in the popular segment under the current model.
Furthermore, the company has stated it is exploring implementing the franchising model
on its popular brands in other states where there is limited growth potential and/or it
generates little margin. On the company's Q3 results conference call, Anand Kripalu, CEO
of USL, mentioned that the company is one-third of the way through its journey on
franchising, and should complete the process in the next six to nine months.
In our scenario analysis below, we assume:
■ Underlying margins improve to the mid-teens level as guided by the company;
■ USL franchises c50% of its popular portfolio;
■ USL's prestige+ portfolio generates the same working capital ratios as Pernod India
(c4% of net sales), which implies 45% of net sales on the popular portfolio. On this
basis, the 50% franchising of the popular portfolio reduces USL's overall working
capital to 16% of net sales from 23%; and
■ A reduction in the number of manufacturing units
On this basis, we estimate Diageo India's CFROI would almost double to 21% by FY20.
Assuming the company franchises 100% of its popular portfolio, we estimate its CFROI
would improve to c33%. However, this would still be below Pernod India, as comparable
margins would be offset by lower asset turns.
USL
Franchising
impact
Royalty
income
USL pro-
forma
Net sales 8,336 -480 100 7,956
Cost of material -4,861 380 0 -4,481
Gross profit 3,475 -100 100 3,475
Gross profit margin - % 42% 21% 100% 44%
Volume - m cases 93 -7 0 86
6 April 2017
Diageo (DGE.L) 26
Figure 68: Accelerated franchising of the popular brands and improving
portfolio mix could boost Diageo India's CFROI
Diageo versus Pernod India CFROI (FY16) including FY20 scenario analysis on % of popular brands franchised) - %
Diageo Africa beer market share by market - % Africa beer organic growth (indexed to 2008 = 100)
Source: Canadean, Company data Source: Company data, Credit Suisse research
Figure 87: For example, Diageo entered Ethiopia at
the same time as Heineken with a similar-sized
business, and yet it has underperformed
Figure 88: Diageo's spirits business has
consistently grown faster than its beer business in
Africa, in line with its strategy
Diageo v Heineken Ethiopia volumes – mhl Diageo Africa beer versus spirits organic growth - %
Source: Canadean, Credit Suisse estimates Source: Company data, Credit Suisse research
Figure 89: Within beer, the Guinness brand has
consistently underperformed the rest of the
portfolio, as the portfolio was imbalanced
Figure 90: Diageo's medium-term growth
aspirations in beer appear to be unambitious
Diageo Africa beer versus Guinness organic growth - % Diageo Africa medium term organic growth guidance v CSe - %
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Kenya Ghana Uganda Nigeria Tanzania Ethiopia Cameroon
Heineken
SABMiller
Diageo
100
120
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280
2008 2009 2010 2011 2012 2013 2014 2015 2016
0.0
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2012 2013 2014 2015 2016E
Diageo Heineken
-5%
0%
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10%
15%
20%
2011 2012 2013 2014 2015 2016 H1 17
Beer Spirits
-10%
-5%
0%
5%
10%
15%
2012 2013 2014 2015 2016 H1 17
Beer Guinness
Diageo guidance CSe
Africa High-single digit 7-9%
Beer Low to mid-single digit 2-6%
Spirits Double-digit 15%
6 April 2017
Diageo (DGE.L) 32
Does Diageo really need beer?
Diageo's rationale for keeping the beer business is it to use the route to market in Africa to
gain scale in mainstream spirits – its view is that beer and mainstream spirits are at
comparable price points and consumption occasions, and therefore tend to appeal to the
same consumers and have similar route to market.
Figure 91: Beer and mainstream spirits offer
comparable price points and hence route to market
overlaps
Figure 92: Diageo is trying to do more in its beer
markets to help push mainstream spirits – Kenya
and Uganda have demonstrated this potential
Price ladder of beer and spirits by segment in Africa (mainstream = 100)
Diageo beer v mainstream spirits market shares (2014) - %
Source: Company data, Credit Suisse research Source: Canadean, Company data, Credit Suisse research
The manufacturing of mainstream spirits is done locally, and tends to be separate from the
brewery. Diageo is rolling out a low-cost portable spirits production unit called 'the Cube',
which requires access to just electricity and water. This helps to keep capex and unit
production costs relatively low (in Ghana it costs just $3m to set-up the Cube versus $45m
for a new distillery), allowing it to reach affordable price points at attractive margins.
Diageo has stated in the past that the margins generated on mainstream spirits are
comparable with international premium spirits, whilst spirits margins in aggregate are
higher than those of beer. We believe the only real overlap is from a salesforce
perspective, whereby the brewery reps also sell mainstream spirits.
Diageo's approach is to use existing big local brands such as Kenya Can Rum in Kenya,
Orijin Bitters in Nigeria and Ghana and Waragi Gine in Uganda, complemented with global
trademarks such as Smirnoff, McDowell's No1, and its primary Scotch brands, Black &
White and VAT 69.
In this regard, the Total Beverages Alcohol (TBA) concept appears to make sense on
paper; however, the cost is the extent to which Diageo’s beer business continues to suffer
and the scope to realise value from selling it to another player.
Below we consider the progress mainstream spirits has made in achieving scale, and
some scenarios for Diageo to keep growing this business in a profitable way, without
depending on beer.
Diageo’s mainstream spirits is already reaching scale
First, we note Diageo's mainstream spirits business in Africa is already achieving scale.
Indeed, when mainstream spirits became a strategic objective in FY14/15, we believed the
company would need beer for perhaps 3-5 years before it could reach critical mass. We
estimate that by FY18 the business will have doubled in size since FY14. John O'Keeffe,
Diageo's Africa head, recently mentioned in an investor call "we are beginning to achieve
mass (in mainstream spirits) and I would expect that to accelerate each year that goes by
as you grow spirits faster than beer".
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Kenya Ghana Uganda Tanzania Nigeria Ethiopia Cameroon
Beer Mainstream spirits
6 April 2017
Diageo (DGE.L) 33
Figure 93: Mainstream spirits represent c50% of
Diageo's African spirits business, the same size as
its premium spirits operations on the continent
Figure 94: Diageo's mainstream spirits will have
doubled by FY18E since it became a strategic
objective in FY14
Diageo FY16 Africa sales split by category - % Diageo Africa mainstream spirits net sales (indexed to 2014 = 100)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates
Alternative scenarios for mainstream spirits include:
1) Potential cost-sharing JVs
Diageo could replicate the Brandhouse cost-sharing JV model with a brewer in markets
where the opportunity exists to boost the penetration of mainstream spirits, namely
Nigeria, Ghana, Tanzania, Ethiopia and Cameroon.
The results achieved in South Africa provide an interesting case study as to how a beer
business can improve spirits distribution. In 2004, Brandhouse was established as a cost-
sharing JV between Diageo, Heineken and Namibia Breweries (NBL), to sell Diageo's
spirits, RTDs, ciders and Guinness as well as Heineken and NBL's beer portfolio. The
scale and investment in the combined entity helped Diageo to gain significant market
share in spirits, which rose to 40% in 2014 from 26% in 2005, and it became the market
leader. This then gave Diageo sufficient scale to operate its spirits business on a
standalone basis, leading to the sale of its share of the JV to Heineken in July 2015.
Figure 95: Up until recently, Diageo had a total
beverage alcohol cost-sharing JV in South Africa
with Heineken and Namibian Breweries
Figure 96: Diageo leveraged the scale of the South
African JV to raise its spirits market share to 40%
from 26% in 2005
2005-15 Diageo South Africa joint venture structure Diageo South Africa spirits market share - %
Source: Company data Source: Company data, Credit Suisse research
Beer
63%
Mainstream
spirits
15%
Premium spirits
15%
RTDs
7%
0
50
100
150
200
250
2014 2015 2016 2017E 2018E
0%
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2005 2014
6 April 2017
Diageo (DGE.L) 34
2) Use beer proceeds to set up own mainstream spirits route to market
We note Diageo is currently exploring mainstream spirits opportunities in new markets where it doesn't have a beer presence. For example, the company has set up a JV with a local spirits distributor in Madagascar. The company could also look to take advantage of economic trading zones across Africa, where it could have an export model and move spirits from one country to another – the logistics requirements for spirits are not as complex as for beer, which needs to be manufactured locally.
Furthermore, we note South Africa-listed Distell, a relatively mainstream player, has successfully managed to expand through Africa by fostering strong relationships with local manufacturers and distributors. For example;
■ In 2014, Distell acquired a 26% stake in KWA Holding East Africa Limited (KHEAL), a leading spirits manufacturer, bottler and distributor in the region, significantly improving its presence in the region. This was raised to 52% stake in April 2017
■ In the same year, Distell also partnered with Finatrade Group in Ghana, a ‘leading West Africa agri-commodities and branded foods company with well-established distribution strengths’, also in surrounding markets in Togo, Benin, Burkina Faso and Ivory Coast.
We note its Africa business (ex South Africa) now generates higher margins than Diageo, despite its smaller scale and no brewery footprint.
Figure 97: Distell now makes higher margins in Sub-Saharan Africa than Diageo
Distell v Diageo Africa EBIT margin (FY16) - %
Source: Company data, Credit Suisse research
We believe Diageo can also take lessons from its experience in India as it develops its own Africa route to market. Given different state-by-state regulatory and route-to-market differences, operating in India is effectively akin to operating across 28 different markets (or a continent). However, Pernod's success in India is an interesting case study for what we think Diageo is trying to achieve with mainstream spirits in Africa – the company has successfully built a profitable local spirits business (>20% margins) from a low base over the past decade, with net sales recording a c25% CAGR over the period from a similar base to where Diageo's business is in Africa today – without needing any scale from beer.
Figure 98: Pernod has recorded a 25% CAGR in India over the past decade, and
is in a comparable business to Diageo's African mainstream spirits business
Pernod India organic growth - %
Source: Company data, Credit Suisse research
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Distell Diageo
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40%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
6 April 2017
Diageo (DGE.L) 35
3) Bolt-on M&A
We think Diageo could target bolt-on M&A in mainstream spirits businesses across the
continent to help bolster its presence in mainstream spirits. In particular, we highlight two
businesses that we think could be a good fit for Diageo;
■ ABI's subsidiary in Tanzania has a local spirits business (Tanzania Distilleries), with
key brand Konyagi, which generates c$70m of net sales and margins in the mid-20%s.
The business has grown sales by a c20% CAGR since 2010.
■ ABI's Zimbabwean subsidiary (Delta Corporation) and Distell have 29% and 37.5%
stakes, respectively, in Africa Distillers, a local spirits business in Zimbabwe that
generates $22m in net sales pa, with a market cap of c$50m. The business has grown
sales by a c15% CAGR since 2010.
Set-up in market companies for premium spirits
For its premium spirits operations, where the route to market is different from that of
mainstream spirits, we think Diageo could establish 'in-market companies' or an 'affiliate
model' as Pernod has done in recent years across its largest markets in the region,
whereby it sets up its own distribution platform and backoffice operations, with an expat
MD and a local team dedicated to sales and marketing – in 2012, when Pernod became
more serious about investing in Africa, it did consider teaming up with a brewer but quickly
came to the conclusion that there were few synergies.
Diageo's current scale in markets such as Kenya and Nigeria justifies an affiliate model, in
our view. In other smaller markets, the company could adopt a more hybrid model, where
back office functions are outsourced to a logistics provider (common amongst other
successful FMCGs) until a certain level of scale is reached – this has also worked well for
the likes of William Grant and Moet Hennessy in recent years.
Figure 99: Pernod has managed to build a successful premium African spirits
business in recent years without beer
Diageo v Pernod Africa spirits organic growth - %
Source: Company data, Credit Suisse research
New chairman could bring a fresh perspective
Javier Ferran joined the board of Diageo in July 2016 prior to being appointed Chairman in
January 2017. Mr Ferran is familiar with the spirits industry, having held board positions at
William Grant & Sons. He also spent 20 years at Bacardi, leaving in 2004 after a spell as
CEO. He is also no stranger to consolidation within the beer industry, having been a non-
executive director of SABMiller when it was acquired recently by ABInBev. This is in
addition to co-founding and being partner of a consumer-focused private equity vehicle,
Lion Capital, since 2005. As such, Mr Ferran's background suggests to us that he could
bring a fresh perspective to the role of beer within Diageo's portfolio.
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2011 2012 2013 2014 2015 2016 H1 17
Diageo Pernod Ricard
6 April 2017
Diageo (DGE.L) 36
Diageo could realise a high valuation multiple for the beer business
We believe Diageo's beer business could warrant a high valuation multiple in a
hypothetical sale, noting:
■ Africa exposure: ABI justified paying a relatively high multiple for SABMiller given the
growth prospects in the region over the medium term – we note Africa represents a
bigger part of Diageo's beer business than it did for SAB.
■ Premium Guinness brand: We believe international brewers such as ABI and
Heineken can better leverage global distribution to deliver better revenue synergies
from incorporating the Guinness brand in their premium portfolios, much more than
Diageo has been able to achieve.
■ Cost-saving potential: We believe ABI and Heineken could generate significant cost
synergies from leveraging their scale and purchasing power to negotiate better terms,
and potentially optimise capacity in Europe.
■ Scarcity value: SABMiller realistically only had one buyer, whereas we believe
ABI/Heineken/Asahi and private equity could all potentially be interested in the Diageo
beer business.
We believe the ABI acquisition of SABMiller is an appropriate benchmark to value
Diageo's beer operations. We note ABI paid 18x EBITDA to acquire SABMiller prior to any
disposals.
However, we believe that Diageo would want to capture the benefit of its relatively low tax
rate (CSe c15% versus c27% for SABMiller). As former CEO Paul Walsh alluded in a 2004
interview on the topic of a potential beer disposal "I cannot sit here and say 'not at any
price', but it would have to be far more than the multiples offered at the moment. And
remember, we ship extract from Ireland and get a very favourable tax position because of
the base in Ireland." As such, we believe the 30x EV/NOPAT multiple paid by ABI for
SABMiller would be a more appropriate benchmark, as it factors in the tax rate difference.
On this basis, Diageo's beer operations would be valued at £12bn, or c20x EBITDA,
where Diageo's lower tax rate adds c10% to its valuation.
Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates
Purchase consideration 109,965
Net debt 10,622
Minority interest 11,400
Enterprise value 131,987
EBITDA 7,418
EBIT 5,910
Tax rate - % 27%
NOPAT 4,314
EV/EBITDA 17.8
EV/NOPAT 30.6
2018E
EBITDA 609
EBIT 465
Tax rate - % 15%
NOPAT 396
NOPAT 396
Multiple - x 30.6
Enterprise value 12,107
Implied EV/EBITDA - x 19.9
6 April 2017
Diageo (DGE.L) 37
What to do with the cash in this scenario? Most likely return it to shareholders
A potential disposal of the beer business would result in a net cash balance for the group.
In this scenario, we believe the company could look to re-leverage the balance sheet back
up to 2.5-3.0x net debt/EBITDA through returning cash to shareholders (via special
dividends and share buybacks), particularly as dividend growth has moderated to mid-
single digits from a FY11-15 CAGR of c9% as the company seeks to restore its dividend
cover.
We believe the only large-scale transaction that makes sense for Diageo at the moment
would be to acquire the 66% of Moet Hennessy that it doesn’t currently own; however, we
see this as unlikely as there is little need for LVMH to part ways – if anything, the
resilience of this alcohol business for LVMH during the recent downturn in the luxury
goods industry reinforces its strategic importance to the group.
Hypothetical analysis of potential interested parties
■ ABInBev – Guinness would fit well in ABI's portfolio of premium brands. However, there
would likely be some anti-trust issues in the US (which we think could be sold to
Constellation Brands) and Tanzania/Uganda (which could be good fit for Heineken).
■ Heineken – Diageo's beer business would complement its premium brand focus and
existing business in most parts of Africa and the US; however, there would likely be
regulatory issues in Ireland, Nigeria and Cameroon, which ABI could help to resolve.
■ Japanese brewers – The asset could be attractive for Asahi, as it would complement its
acquisition of the Peroni/Grolsch brands from SABMiller in Europe.
■ Private equity – We would not rule out potential interest from private equity, given Mr
Ferran's extensive experience and connections in the industry.
6 April 2017
Diageo (DGE.L) 38
Valuation implications for Diageo Diageo's share price has underperformed peers in recent years
In US$-terms, Diageo's share price has underperformed its peer group by c30% over the
past three years, driven by declining returns. As such, despite the recent improved
performance, the company hasn’t created shareholder value relative to peers in recent
times.
Figure 102: However, on a three-year view, DGE's share price has
underperformed by c30% in US dollars
Diageo share price performance versus peers (Jan 2014 = 100) in US$
Source: Company data, Credit Suisse estimates Peer group includes 15 global staples companies in Diageo's TSR peer group, which includes ABInBev, Brown Forman, Carlsberg, Coca-Cola, Colgate, P&G, Danone, Heineken, Kimberly-Clark, Mondelez, Nestle, PepsiCo, Pernod Ricard, Reckitt, Unilever
Benchmarking Diageo’s spirits business
In the event of a beer disposal, we believe there could be increased debate as to the
appropriate valuation of the rest of the business. We believe the bull case is for the core
spirits business to re-rate to trade in line with peers Remy and Brown-Forman.
We believe Remy and Brown-Forman's relatively high valuation multiples reflect their
strong topline growth and high exposure to brown spirits, which command high barriers to
entry given the ageing requirements.
Figure 103: Diageo trades at a c15-30% valuation discount to Remy and Brown-
Forman
Diageo calendarised FY18E valuation multiples versus Remy & Brown-Forman - x
Priced as of 4 April 2017; Source: Credit Suisse estimates
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Diageo Staples peers
P/E EV/EBITDA EV/EBIT EV/NOPAT
Diageo 18.4 13.7 15.2 19.7
Remy 27.6 17.0 18.3 26.5
Brown-Forman 23.2 16.6 17.6 24.8
Avg 25.4 16.8 18.0 25.6
Discount -28% -18% -15% -23%
6 April 2017
Diageo (DGE.L) 39
In the case of Diageo, we note:
■ Growth: We forecast Diageo's core spirits (ex beer & RTDs) to grow by c6% over the
medium term, an acceleration from the 4.5% delivered over the past decade, driven by:
− The consolidation of India, which alone adds c100bps to its medium term growth
− A more normalised outlook for the Scotch industry
− Increased focus on the mainstream spirits opportunity in emerging markets, which
gives incremental growth from illicit alcohol and beer and does not cannibalise the
premium business
− Re-investment of two-thirds of its targeted £500m productivity programme in FY17-
19 (c300bps on net sales).
Figure 104: We expect Diageo's spirits business to
grow c100bps faster than the group at c6% CAGR,
helped by the consolidation of India (+100bps)
Figure 105: Diageo's organic growth is outpacing its
peer group by over 100bps
Diageo medium term growth by division - % Diageo organic growth versus peers - %
Source: Credit Suisse estimates Source: Company data, Credit Suisse research
■ Returns: We estimate Diageo's core spirits business generates 23% CFROI, which is
double the level of Remy and in line with Brown-Forman.
Figure 106: We believe Diageo's core spirits
business can grow ahead of Brown-Forman, but
slightly below Remy
Figure 107: Diageo's spirits business generates
comparable CFROI to Brown Forman, and is
superior to Remy
Diageo spirits organic growth versus peers - % Diageo spirits CFROI v Remy and Brown-Forman
R&D Expense, PPE, Current Assets, Current Liabilities
■ The following assumptions have been made for specific line items based on CS
Research data :
− Asset and Income from Associates/JVs: allocated to the Other Spirits segment
− Minority Interests: allocated to the Vodka, India and Beer segments
− Income Tax: used segment specific tax rates for India and Beer segments based
on CS Research data and average rate for the remaining segments.
− Goodwill: allocated to the Other Spirits and India segments
− Other Intangibles: Definite life intangibles and software have been allocated to the
relevant segments. Indefinite life intangibles have also been allocated across the
segments, while the distribution rights for Vodka have been allocated to the Vodka
division specifically.
■ For the purpose of the Diageo Group segmental analysis, we have excluded the
revenue and cash flow from wine following the disposal of the wine businesses in the
US and the UK in 2016.
■ The historical and forecast Gross Cash Flow and Gross Investment data for the Scotch
business segment are based on CS research assumptions based on historical
company disclosure, industry data and peer group analysis.
■ For the Spirits division, Gross Cash Flow and Gross Investment data are a line-by-line
consolidation of the Gross Cash Flow and Gross Investment data for the Scotch,
Vodka, North American Whisky and Other Spirits segments.
■ The scenario analysis for the India business segment franchised in 2020e has been
based on CS Research data.
■ Items for which no disclosure was available from either CS Research or the company
segmental disclosures, we adopted the following approach: Income Statement items
were allocated based on the share of revenues of each operating segment and
Balance Sheet items were allocated based on the share of total assets on each
operating segment.
6 April 2017
Diageo (DGE.L) 47
Companies Mentioned (Price as of 04-Apr-2017) Anheuser-Busch InBev (ABI.BR, €103.8) Asahi Group Holdings (2502.T, ¥4,262) Brown Forman Corporation (BFb.N, $45.82) Carlsberg (CARLb.CO, Dkr647.0) Colgate-Palmolive Company (CL.N, $73.62) Constellation Brands Inc. (STZ.N, $161.51) Costco Wholesale Corporation (COST.OQ, $167.25) Danone (DANO.PA, €63.92) Diageo (DGE.L, 2286.5p, OUTPERFORM, TP 2500.0p) Distell Grp (DSTJ.J, R140.89) Heineken (HEIN.AS, €80.0) Kimberly-Clark Corporation (KMB.N, $132.22) LVMH (LVMH.PA, €206.2) Molson Coors Brewing Co (TAP.N, $95.59) Mondelez (MDLZ.OQ, $43.46) NBL (NBS.NM, 3361.0c) Nestle (NESN.S, SFr76.75) PepsiCo, Inc. (PEP.N, $112.08) Pernod-Ricard (PERP.PA, €111.65) Reckitt Benckiser (RB.L, 7246.0p) Remy Cointreau (RCOP.PA, €91.49) Royal Unibrew (RBREW.CO, Dkr295.0) The Coca-Cola Company (KO.N, $42.68) Unilever (UNc.AS, €46.48) United Spirits Ltd. (UNSP.BO, Rs2048.3)
Disclosure Appendix
Analyst Certification I, Sanjeet Aujla, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Diageo (DGE.L)
DGE.L Closing Price Target Price
Date (p) (p) Rating
08-Apr-14 1878.50 2200.00 O
28-Apr-14 1821.50 1950.00 N
18-Dec-14 1831.00 1850.00
13-Mar-15 1864.00 1700.00 U
20-Apr-15 1870.50 1800.00
08-Jun-15 1880.00 1800.00 N
28-Jul-15 1819.00 *
31-Jul-15 1789.50 1750.00 N
06-Oct-15 1819.00 1780.00
29-Oct-15 1885.50 2100.00 O
13-Apr-16 1921.50 2130.00
08-Jul-16 2143.50 2370.00
17-Jan-17 2131.50 2430.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
U N D ERPERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the a nalyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms repr esenting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms represe nting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Lati n American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential with in an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.
6 April 2017
Diageo (DGE.L) 48
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Diageo (DGE.L)
Method: Our target price of £25 is derived from an APV (adjusted present value) - a hybrid discounted cash flow which splits the value of the tax shield from the operating cash flows (the latter discounted at a cost of equity of 8%). We value Diageo's 34% stake in Moet Hennessey based on the fair value derived in LVMH's recent accounts (which is based upon valuation multiples of comparable firms), with the remaining assets at book value. We value Diageo's minority interests excluding USL (mainly Guinness Nigeria, EABL, and Ketel One) on a valuation multiple consistent with Diageo, whilst we value Diageo's minority stake in United Spirits at a 50% discount to its market valuation. We rate the stock Outperform given the upside potential indicated by our target price.
Risk: Risks to our target price and Outperform rating include: increased regulation in Europe/US, the level of investment required to build international markets, competitor activity, and excessive excise duty increases.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (DGE.L, UNSP.BO, HEIN.AS, BFb.N, LVMH.PA, ABI.BR, PERP.PA, RCOP.PA, STZ.N, KO.N, DANO.PA, KMB.N, MDLZ.OQ, NESN.S, PEP.N, RB.L, UNc.AS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (HEIN.AS, ABI.BR, KO.N, MDLZ.OQ, NESN.S, PEP.N, UNc.AS) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (DGE.L, LVMH.PA, KO.N, MDLZ.OQ, NESN.S) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (HEIN.AS, ABI.BR, KO.N, MDLZ.OQ, NESN.S) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (HEIN.AS, ABI.BR, KO.N, MDLZ.OQ, NESN.S, PEP.N, UNc.AS) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DGE.L, UNSP.BO, HEIN.AS, BFb.N, LVMH.PA, ABI.BR, PERP.PA, RCOP.PA, CARLb.CO, STZ.N, TAP.N, 2502.T, KO.N, CL.N, DANO.PA, KMB.N, MDLZ.OQ, NESN.S, PEP.N, RB.L, UNc.AS, COST.OQ) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (DGE.L, LVMH.PA, KO.N, MDLZ.OQ, NESN.S) within the past 12 months A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (UNSP.BO, HEIN.AS, BFb.N, LVMH.PA, ABI.BR, PERP.PA, RCOP.PA, STZ.N, TAP.N, 2502.T, KO.N, DANO.PA, KMB.N, MDLZ.OQ, NESN.S, RB.L, UNc.AS) within the past 12 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (UNSP.BO) As of the end of the preceding month, Credit Suisse beneficially own between 1-3% of a class of common equity securities of (NESN.S). Credit Suisse has a material conflict of interest with the subject company (HEIN.AS) . Credit Suisse is acting as Financial Advisor to Heineken NV in relation to its acquisition of Brasil Kirin Holding SA, a subsidiary of Kirin Holding Company
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Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (DGE.L, HEIN.AS, ABI.BR, PERP.PA, RCOP.PA, CARLb.CO, DANO.PA, NESN.S, RB.L, UNc.AS). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (DGE.L, UNSP.BO, HEIN.AS, ABI.BR, KO.N, MDLZ.OQ, NESN.S) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse InternationalSanjeet Aujla ; Alexander Evans ; HOLT Sector Specialist: Nadia Panagou ; HOLT Sector Specialist: Steffen Spillecke To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse International ......................................................................................................................................Sanjeet Aujla ; Alexander Evans
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