Diageo and Remy Cointreau in a sweet spot, Mitchells & Butlers still has challenges, and Vivo Energy is the latest UK-listed takeover target

Markets: Diageo and Remy Cointreau in demand

Diageo has been enjoying a strong rally since September and on Thursday was once again the biggest contributor to the FTSE 100 in points terms. Investors have been warming to the recovery story as it enjoys greater sales from pubs, restaurants and hotels now that many Covid restrictions have been lifted,” says Russ Mould, Investment Director at AJ Bell.

“Helping to drive shares in Diageo was positive read-across from Remy Cointreau whose shares jumped 9.4% after reporting stronger than expected first half results including operating margins at a new all-time high.

“While there is a growing trend for more people not to drink alcohol, there is also a shift with others preferring more premium spirits which is playing to Diageo and Remy Cointreau’s strengths.

“Year to date Diageo’s share price is up by 33%, meaning it has achieved three times the returns from the FTSE 100 in 2021.

“The FTSE 100 itself was flat on Thursday as strength in consumer, industrial and healthcare stocks was offset by weakness in technology, energy, financials and real estate.”

Mitchells & Butlers

“The past few years have been difficult for Mitchells & Butlers, but it finally returned to profitability during its second half period. However, it does look like the business is running very hard just to achieve the smallest gains.

“On a full year basis, the results are ugly reading as more than £1 billion went through its tills but it still lost money as the period included the lockdowns that started in November 2020 and January 2021.

“It is now making some progress on sales growth, but the amount is tiny, and the outlook is far from favourable.

“Pub and restaurant operators traditionally thrive in December from Christmas parties. Nervousness on behalf of many companies could see reduced staff party volumes this festive season, particularly as Covid rates are shooting up. Managers won’t want to risk employees getting ill and a lot of people still feel uneasy about mixing in a crowded room.

“Cost inflation is another big pressure on the business, and Mitchells & Butlers could find it hard to pass this on to the customer in the form of higher prices.

“Mitchells & Butlers has long been a laggard in the pubs and restaurant sector, and one can’t help feel it needs to sharpen its focus. The company says it tries to offer something for everyone, whether that’s a sleepy country pub or a livelier atmosphere in a city centre establishment.

“However, the group has 17 different brands which seems a bit excessive. Perhaps the current environment might force the group to focus harder on what it does best, rather than being something for everyone?”

Vivo Energy

“The three and a half-year history of African service station operator Vivo Energy on the London market seems to have come and gone without anyone really noticing.

“It is probably in everyone’s best interest that its top shareholder, oil trader Vitol, has emerged with a premium-priced bid.

“While the offer is pitched materially above the current share price, the valuation is substantially below where Vivo was valued when it first listed.

“The Vivo story, running the distribution and marketing of Shell and Engen petroleum products across Africa, just never really gained traction.

“Perhaps it was the focus on Africa which had investors on their guard, as there have been relatively few success stories on the UK stock market to emerge from the continent to date, or maybe Vivo’s patchy profit performance itself was to blame.

“Net income was lower in the first half of this year than it was in the first half of 2018 suggesting that, for all the roll-out of new facilities, the company was struggling to get anywhere fast.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.