MASTER IN FINANCE MASTER’S FINAL WORK PROJECT EQUITY RESEARCH: DIAGEO PLC ANDRÉ MIGUEL BRITO DUARTE OCTOBER 2019 MASTER IN FINANCE MASTER’S FINAL WORK PROJECT EQUITY RESEARCH: DIAGEO PLC ANDRÉ MIGUEL BRITO DUARTE SUPERVISOR: PROFESSORA DOUTORA ANA ISABEL ORTEGA VENÂNCIO OCTOBER 2019 Acknowledgements Since this project represents the end of one of the most important stages of my life, I would like to express my sincere gratitude, to all the persons that had a relevant role along this journey. First, to Professor Ana Venâncio for the guidance, time and patience that had for me during the realization of this project. Second, to my parents and girlfriend, for making all this possible. And last but not least, to all my friends and colleagues for all the support and guidance given during this journey. 3 Index Abstract ........................................................................................................................................................ 8 Resumo ........................................................................................................................................................ 9 Index of Figures .......................................................................................................................................... 10 Index of Tables ........................................................................................................................................... 12 1. Diageo Plc: The road to premiumisation ................................................................................................. 13 2. Business Description .............................................................................................................................. 14 Business units ......................................................................................................................................... 14 Key Brands ............................................................................................................................................. 15 Company strategies ................................................................................................................................ 16 3. Management and Corporate Governance ............................................................................................... 17 Ownership structure ................................................................................................................................ 17 Corporate Governance ............................................................................................................................ 17 Company’s key members ........................................................................................................................ 18 Social Responsibility ............................................................................................................................... 19 Historical Financial Analysis .................................................................................................................... 20 4. Core Countries Outlook .......................................................................................................................... 23 Global Economic Outlook ........................................................................................................................ 23 Europe’s Economic Outlook .................................................................................................................... 23 North America’s Economic Outlook ......................................................................................................... 23 Africa’s Economic Outlook ...................................................................................................................... 24 Latin America and Caribbean Economic Outlook .................................................................................... 25 United Kingdom Economic Outlook ......................................................................................................... 25 Brexit ...................................................................................................................................................... 25 5. Industry Outlook ..................................................................................................................................... 27 Beverage Industry Outlook ...................................................................................................................... 27 Alcoholic Beverages Industry Outlook ..................................................................................................... 28 Peer Group ............................................................................................................................................. 30 Competitive Position ............................................................................................................................... 31 Porter’s Five Forces ................................................................................................................................ 31 6. Investment Summary .............................................................................................................................. 33 7. Valuation ................................................................................................................................................ 34 Valuation Methodology ............................................................................................................................ 34 Key Valuation Drivers .............................................................................................................................. 34 Discounted Cash Flow Valuation ............................................................................................................ 36 Cost of Capital Assumptions ................................................................................................................... 36 6 Market Multiples Approach ...................................................................................................................... 37 Financial Statements Forecast Analysis .................................................................................................. 38 8. Investment Risks .................................................................................................................................... 40 Economic and Market Risks .................................................................................................................... 40 Political and Regulatory Risks ................................................................................................................. 41 Operational Risks .................................................................................................................................... 42 Risks to Price Target ............................................................................................................................... 42 Appendix 1 – Income Statement ................................................................................................................. 45 Appendix 2 – Balance Sheet ...................................................................................................................... 46 Appendix 3 – Common Size Income Statement .......................................................................................... 47 Appendix 4 – Common Size Balance Sheet ............................................................................................... 48 Appendix 5 – Assumptions for Income Statement....................................................................................... 49 Appendix 6 – Assumptions for Balance Sheet ............................................................................................ 50 Appendix 7 – Sales Forecast Assumptions ................................................................................................. 51 Appendix 8 – Net Working Capital .............................................................................................................. 52 Appendix 9 – CapEx ................................................................................................................................... 53 Appendix 10 – Key Financial Ratios ........................................................................................................... 54 Appendix 11 – Risk Free Rate .................................................................................................................... 55 Appendix 12 – Cost of Debt ........................................................................................................................ 56 Appendix 13 – Discounted Cash Flow Valuation Method ............................................................................ 57 Appendix 14 – Peers Selection ................................................................................................................... 58 Appendix 15 – Risks to Price Target ........................................................................................................... 59 Appendix 16 – Business Units Constitution ................................................................................................. 61 Appendix 17 – Countries by Geographical Area ......................................................................................... 62 Appendix 18 – Key Brands