Diageo's £1bn shot

DiageoThe UK's coalition government is desperately keen to get Britain growing again by 'exporting our way to recovery'.

A 'dram' fine business
For inspiration, ministers should look to the global success story that is Scotch whisky. With demand for a wee dram or two surging among the growing middle classes of Asia, Latin America and Africa, sales of Scotch are soaring.
Indeed, exports of Scotch whisky leapt for the seventh year in a row last year, reaching a record high of £4.2 billion. According to the Scotch Whisky Association, this was almost a quarter (23%) ahead of 2010's sales, so this is a new golden age for the golden liquid.

A £1 billion shot
With 108 distilleries licensed to produce Scotch whisky, the UK ships 40 bottles overseas each second of the year, boosting UK exports by £134 a second. Sales of Scotch generate £1 billion in taxes to HM Treasury, plus the industry directly employs 10,300 people and supports another 35,000 UK jobs.

As a result, FTSE 100 giant Diageo yesterday announced that it is to invest £1 billion ($1.5 billion) into boosting Scotch production over the next five years.

The world's largest producer of Scotch whisky -- with brands such as Johnnie Walker, J&B, Bell's, Windsor Premier and Buchanan's -- is to build a new malt distillery in Scotland, add extra stills and expand warehouses, creating more than 850 jobs in Scotland's highlands and islands.

Clearly, Diageo's directors strongly believe that Scotch is shaking off its old-fashioned image to become the tipple of choice for free-spending professionals in emerging markets. Indeed, some analysts predict that the amber spirit is only at the beginning of a 'super-cycle' of sharply rising global demand.

Hence, Diageo has ambitious plans to boost its production capacity by between 30% and 40%. If sales -- already at £3 billion -- continue to rise steeply, then Diageo should commission a second distillery in 2015/16.

Whisky galore
Scotch whisky is sold in 200 markets worldwide, but the US is the biggest single export market, with sales of £655 million in 2011, up 31%. Other key markets include France (£535 million), Singapore (£318 million), Spain (£259 million), South Africa (£166 million) and Taiwan (£155 million).

What's more, Scotch whisky accounts for a mere 1% of India's vast sales of whisky, so there is enormous scope to improve exports to the subcontinent.

Scotch whisky is becoming a high-status drink among the young elites of emerging markets and the BRIC countries (Brazil, Russia, India and China). Thus, the future looks rosy for Diageo and other leading whisky producers -- including its French arch-rival, Pernod Ricard, maker of Ballantine's and Chivas Regal.

As for Diageo itself, its shares trade at 1,592p. At this price, the group is valued at £40 billion, making it one of the FTSE 100's leading mega-cap firms. Its shares trade on a forward price-earnings ratio of 17.3 and offer a prospective dividend yield of 2.9%, covered 2.1 times. Although these are premium ratings, Diageo also has ambitious growth plans.

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