BUSINESS STOCKMARKET

Bullish market…Magners to double output…Guinness not so good for diageo…SABmiller due upward rating…Britvic bid

Bullish market

The UK stockmarket trades on uncertainty, with bids and deals, actual and rumoured, pushing the market while fears of inflation and higher interest rates pull it back. Oil and gold prices have fallen back, so it looks like the bulls will prevail over the bears, and we should hit 6,000 as measured by the FTSE 100 Index by the end of the year.

Magners to double output

Magners cider, made by the Dublin-based C&C Group, has added fizz to the drink sector by delivering a massive 250% rise in sales. This resulted from a major advertising campaign behind Magners costing E30 million. The success also results from the bold decision by management to sell Magners nationally, with sales further boosted by hot weather in June and July. Turnover of the C&C Group soared by 25%. The cider advertising campaign, based on Donovan’s 1966 hit Sunshine Superman, has appealed strongly to women.

Latest news is that C&C Group is to invest £135m to double its cider-making capacity in Clonmel inside 18 months. The investment will reduce its expectations of free cash and underlying earnings by between 30% and 40% this year, but the progressive dividend policy won’t be altered.

Guinness not so good for diageo

Diageo was one of the biggest fallers in the FTSE 100 Index after the market digested unappetising full-year figures. Although group profits rose from £1.93 billion to £2.15bn, City analysts were disappointed the group did not take the opportunity to increase the current year’s profit forecast of “at least” 7% growth.

Group sales rose from £8.97bn to £9.7bn. Before the results were announced, punters had been piling into Diageo’s shares as an attractive defensive sector investment in these uncertain times, but they are now having second thoughts as management warned that unfavourable exchange rate movements could clip £75m off operating profits this year. However, punters have the prospect of a £1.4bn share buy-back which will support the share price. Deutsche Bank expects adjusted earnings per share to rise this year from 51.2p to 56.4p.

Far from Guinness being good for its makers, volumes of Guinness sold in Ireland slumped by a hefty 8%. Net sales fell by 3% after price increases. The ban on smoking in pubs in Ireland is a contributory factor to the fall as potential customers stayed at home to drink a can of lager. On a worldwide scale, Guinness sales were up 3% in the latest year. But this is small beer compared with other Diageo brands – Captain Morgan rum up 13%, Johnnie Walker up 11%, and Smirnoff up 10%. Sales of Scotch, Diageo’s core product, grew by 10% last year.

In response to the poor Guinness showing in Ireland, Diageo is running a trial of the lower-alcohol Guinness Mid-Strength at 80 outlets. Chief executive Paul Walsh waved away any suggestion Diageo may sell Guinness, stressing, “We are very happy with the portfolio that we have.”

While sales in Europe were flat, sales in North America frothed ahead 7% as a result of heavyweight advertising campaigns behind Red Stripe Beer and Guinness. Sales of Smirnoff alcopops dropped 5%. The City dealers reckon the US market is showing evidence of “being spent out”, which clouds the outlook for spirits across the Atlantic.

SABmiller due upward rating

SABMiller has been underperforming its competitors, such as Scottish & Newcastle, due to its big presence in emerging markets, but there is speculation from dealers that the shares are overdue for an upward rating. The City dealers reckon the emerging  markets – Latin America, Asia and Africa among them – are susceptible to heavier currency and economic upsets than more mature markets, although they also offer higher growth opportunities.

The currencies key to SABMiller’s earnings are the rand and the Colombian peso, and these have been recovering in recent months.

The growth from emerging markets has pushed SABMiller’s organic volume sales of lager in the first quarter of its current financial year up 7% with the highest growth coming from eastern Europe, South America and Asia.

The US$120 million purchase of the Foster’s brand plus a brewery in India boosted SABMiller’s status in this booming market.

Britvic bid

Britvic, maker of Tango and Robinsons soft drinks, fizzed up again on the resurgence of dealer speculation that PAI Partners, the French private equity firm will put £537 million on the table – a 250p per share bid – for Britvic. The City scribblers agree the price offered  would be attractive to shareholders if a bid materialises.

© db October 2006