Morgan Stanley: Diageo Has 'Hidden Value'

In a report published Tuesday, Morgan Stanley analyst Olivier Nicolai maintained an Overweight rating on Diageo plc (ADR) DEO, with a price target of 2,200p, while expressing optimism regarding the improvement in "underlying momentum" in the company's key markets. 3G Capital is reportedly considering a bid for Diageo. The companies have not confirmed the news as of now. Since Diageo is 100 percent free float, a "takeover bid cannot be ruled out despite its size," analyst Olivier Nicolai said. Diageo seems to have a robust portfolio of brands that have "high barriers to entry, scale benefits, leadership positions in key markets including the US where momentum is improving, non-core assets available for sale and relatively low gearing," Nicolai stated. Despite these positives, the company's shares are currently trading at a 10 percent discount to Consumer Staples. Nicolai believes that Diageo has a "valuable portfolio of brands," which could "attract a consortium" for a possible deal. Moreover, the "hypothetical SOTP" implies scope for material upside. "Diageo's discount looks unjustified given underlying assets and improving momentum post under performance," the report added. Nicolai expects Diageo to generate flat organic sales in FY15, but this to accelerate to 4.2 percent organic sales growth and 5.3 percent organic EBIT growth in FY16.