Morning Note: Market news and updates from Diageo and Halma.

Market News

US equities were little changed last night – S&P 500 (-0.2%); Nasdaq (+0.04%) – although they rallied after-hours, partly driven by a rally in Micron Technology on strong earnings. US lawmakers averted a government shutdown and quickly passed a short-term federal funding bill to keep operating through to 20 December, which the President is expected to sign. Fed Chair Powell is due to speak at the New York Treasury Market Conference. The 10-year Treasury yields 3.78%, while gold trades at $2,660 an ounce, helped by heightened tensions in the Middle East. Indian gold demand looks set for a strong few months as a cut to the import tax and a buoyant festival and wedding season drive purchases. Imports more than tripled to 140 tons in August from July.

In Asia this morning, equity markets continued what has been a strong week with advances throughout the region: Nikkei 225 (+2.8%); Hang Seng (+3.9%); Shanghai Composite (+3.6%). China will implement “forceful” rate cuts and ensure necessary fiscal spending, the Politburo said. It is considering injecting up to $142bn into its biggest state banks in its latest attempt to jump start the economy. Chinese equities saw the largest daily net buying since March 2021. The yen softened to 144.6 versus the dollar.

The FTSE 100 is currently trading 0.4% higher at 8,305. Companies trading ex-dividend this morning include Barratt Developments (2.39%), BAT (2.07%), and Rightmove (0.54%). Evidence is mounting in the UK that the budget gloom is rattling confidence, with surveys by the REC and BRC showing a decline in sentiment. Sterling trades at $1.3350 and €1.1973.

Brent Crude dropped to $71.30 a barrel on OPEC oversupply concerns. The FT reports Saudi Arabia is ready to abandon its unofficial price target of $100 a barrel for crude as it prepares to increase output, in a sign the kingdom is resigned to a period of lower oil prices. Both BP and Shell are trading 4% lower in response.

Source: Bloomberg

Company News

Diageo has this morning released a brief, but reassuring trading commentary ahead of its 2024 AGM, highlighting the group’s expectations are unchanged from when it reported its results in July. In response, the shares have been marked up by 4% in early trading.

Diageo is a leading global drinks company, with a unique portfolio of iconic brands including Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, and Guinness. The group is an integrated operator, producing and supplying drinks at a variety of price points across strong global distribution routes. In the long term, we believe Diageo is well placed to benefit from the trend towards premiumisation – including its 34% stake in Moet Hennessey, the group generates more than half of its sales from high margin, premium brands. In addition, product innovation and effective marketing allow Diageo to get ahead of consumer trends and drive sales growth. The group has a strong presence in under-penetrated emerging markets, where the number of people of legal purchasing age is set to increase by over 450m over the next decade. Wealth is also increasing in these regions, with the middle class expanding and consumers shifting from local products to higher-margin premium international brands.

The group is targeting annual organic net sales growth of 5% to 7%, underpinned by the strength of its advantaged position across geographies, categories, and price tiers. The aim is to increase its value share of the total beverage alcohol (TBA) market from 4.7% in 2023 to 6% by 2030.

In today’s update, the group highlights that the global environment remains challenging for both the industry and Diageo. While consumers continue to be cautious in this environment, the company is focused on strengthening the resilience of its business through operational excellence, productivity, and strategic investments to win market share. The group has made good progress on its strategic initiatives, including US route-to-market enhancements, and in Nigeria Diageo is progressing well towards completion of the agreement to restructure the business model.

Expectations are unchanged from when the group reported its fiscal 2024 preliminary results on 30 July. The company still believes the fundamentals for global TBA, and particularly the spirits industry, remain strong and is confident that when the consumer environment improves, growth will return. The main uncertainty remains the timing of a recovery. In the meantime, free cash flow generation has been strong, and the dividend continues to grow.

Source: Bloomberg

Halma has today released a brief trading update ahead of its financial half-year end on 30 September 2024 and reiterated its guidance for the full year. In response, the shares have been marked by 1% in early trading.

Halma is a global group of life-saving technology companies, with a focus on safety, health, and the environment. The group’s technology is used to save lives, prevent injuries, and protect people and assets across a broad range of sectors including commercial and public buildings, utilities, healthcare/medical, science/environment, process industries, and energy/resources. The main growth drivers include increasing health and safety regulation, demand for healthcare from an ageing population, and demand for life-critical resources. Strong market positions deliver upgrade and replacement sales opportunities as customers seek to maintain regulatory compliance and conform with best practice. As a result, customer spending is often non-discretionary and drives sustained demand throughout the economic cycle.

Today’s statement highlights the group has made further progress in the last six months in trading conditions which remain varied across its end markets. It expects to deliver good organic constant currency revenue growth, supported by order intake in the year to date which is ahead of both revenue and the comparable period last year.

The company expects the adjusted EBIT margin to be modestly higher than in the first half of the prior year, consistent with its guidance for the year as a whole.

As expected, there was no update on the group financial position with today’s statement. At the last balance sheet date (31 March 2024), with financial gearing was 1.35x net debt to EBITDA, well within the target of ‘up to 2x’. The group does expect to deliver a strong cash performance, enabling substantial investments, both organically and in acquisitions, to further expand opportunities for growth over the medium to longer term.

Halma made four acquisitions in the first half of this financial year, all in the Safety sector, for a maximum total consideration of £85m. The acquisition pipeline remains healthy across all three of its sectors. The company also made one small disposal, Hydreka SAS, for £7m.

Halma has a fantastic dividend track record, having increased its payout by 5% or more every year for the last 45 years. In the last financial year, the dividend was raised by 7% to yield 0.8%.

Looking forward, the company continues to expect to deliver good organic constant currency revenue growth in the year and an adjusted margin of around 21%.

Source: Bloomberg