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“A very strong start to markets sets the tone for an interesting week ahead, including Brexit trade talks and the first 2020 US Presidential debate. Biden has the lead in opinion polls but Trump has form on the stage.
“Equities rallied across Europe and Asia with financial stocks and drink makers in particular demand. HSBC led the banking sector after Chinese insurance group Ping An boosted its stake to 8% (from 7.95%) following recent share price weakness in the former. Diageo impressed investors with its latest trading update.
“The FTSE 100 jumped 1.6% to 5,934 while the domestic-focused FTSE 250 index advanced 1.1% to 17,232. The pound strengthened 0.4% against the US dollar at $1.2793,” says Russ Mould, Investment Director at AJ Bell.
Diageo
“Diageo’s trading update is remarkably upbeat and shows good progress in getting operations back on track. Demand is returning from many important places, albeit some areas are likely to remain fragile near-term such as sales in airports and in emerging markets.
“Like many businesses around the world, Diageo’s earnings are not going to suddenly recover to pre-pandemic levels. While alcohol sales for the at-home market may have been resilient throughout the crisis, the company still derives a large chunk of its earnings from bars, pubs, hotels and restaurants.
“These outlets continue to be susceptible to disrupted and depressed trading which might explain why analysts are not forecasting any sales growth for Diageo in the current financial year, ending June 2021.
“In the previous financial year sales fell by 8.7% from £12.9 billion to £11.8 billion. The consensus forecast for this year is the same level of revenue, rising to £12.5 billion in 2022. That means Diageo may have to wait until 2023 before its sales have managed to surpass the pre-pandemic level at circa £13 billion.
“Its job is to now focus on strongest areas and try to fuel positive sales momentum while waiting for the weaker markets to stabilise.
“Among the most encouraging areas is the US where performance is ahead of expectations, helped in part by the spirits category doing well. That vindicates the company’s ongoing willingness to invest in the spirits market, as illustrated by Diageo making two seemingly pricey acquisitions in this market in recent years.
“Last month it bought Ryan Reynolds-backed Aviation American Gin on a 20-times sales multiple and in 2017 its acquisition of the George Clooney-backed Casamigos super-premium tequila brand was also thought to have been done on a similarly high sales multiple.”
William Hill
“Bookmaker William Hill’s future could soon be a bit more glamorous than a glance at its high street store estate would suggest as Caesars Entertainment, with all of its Vegas glitz and glamour, seemingly assumes pole position in a battle to acquire the business.
“It looks like Caesars has stolen a march on rival bidder private equity firm Apollo and the deal, if it happens, looks like a vindication of the strategy to go after the US market. This path has been trodden unsuccessfully by UK gambling firms in the past.
“Caesars isn’t buying William Hill for the humble bookies on your local high street but for its strong base in the emergent US betting space which continues to open up, driven by the legalisation of sports wagering.
“An existing agreement with Eldorado, which recently merged with Caesars, makes the deal a pretty logical one – with the joint venture to be scrapped if the transaction goes through.
“However, shareholders have been here before. Mooted deals with Canada’s Stars Group, 888 and Rank and Amaya (now owned by Flutter Entertainment) a few years back were all unconsummated in the end.
“Investors may also be hoping for a more generous offer, despite suggestions William Hill’s board is minded to recommend the 272p on the table from Caesars, with some observers suggesting the price undervalues the long-term potential across the Atlantic.
“The action around William Hill is likely to spark speculation over the other UK firms with footprints in the US – as a British invasion of the US gambling space may finally pay dividends.”
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