Leading analyst Simon French, of Cenkos, has said he sees little scope for progress at Greene King in the short-term.
Downgrading the group from Buy to Hold, French also reduced EPS forecasts by c2.5% per annum FY2018-19E.
He said: “We struggle to identify catalysts for the stock to outperform over the coming months given ongoing headwinds. The stock has performed relatively well this year, up 8.5%, to trade on a CY2017E adj EV/EBITDAR of 8.2x, a P/E of 10.8x and a yield of 4.5%. However, with the next newsflow not until FY results on 29 June we see little scope for further progress in the short-term. On our revised forecasts FY2019 PBT will be lower than FY2017. The dividend yield provides some support.”
He identified the following four challenges for Greene King:
Completing integration of Spirit Pub Company
At the group’s H1 results, it reported integration was ahead of schedule and that it was on track for £30m synergies by the year-end, thereby delivering its original three year target in two years. The previously revised £35m target remains on track to be achieved by the end of FY2018. It also detailed that the average brand conversion sales uplifts were over 30% from the first 50 completed although it has extended the brand conversion programme from three to four years. The group also detailed that the decision to relocate the managed pub business to Burton is not without its challenges. Pub Company performance continues to be held back by the underperformance of the acquired Fayre & Square brand, excluding which LFL sales are up 1.6% YTD.
Maintain relevance of key brands in the enlarged estate
Greene King’s brand strategy centres on five key brands: Greene King, Farmhouse Inns, Flaming Grill, Hungry Horse and Chef & Brewer. These all occupy distinct but broad market positions although the industry trend appears to be more for more, niche brands and competitors such as Mitchells & Butlers and Stonegate Pub Company are expanding, not shrinking, their range of formats to reflect consumer trends. That said the experience of the previous recessions was for customers to seek the reassurance from a branded experience when household finances were tight and consumer confidence low.
Reinvigorate earnings growth
On our revised forecasts FY2019 PBT will be lower than FY2017 PBT although consensus forecasts show a more positive trajectory. However, given JD Wetherspoon’s comment that 3-4% LFL sales growth will be required to keep cash profits flat in FY2018 and just an extra £5m of synergies to be achieved from the Spirit acquisition then our earnings forecasts do not appear unreasonable. Greene King has identified £4m NLW cost increase, £3.5m apprenticeship levy, £7m business rates revaluation, a 9% increase in utilities (c£3m we estimate) and unquantified FX-related increased on food and drink as headwinds in FY2018. In FY2019 there will be a further £6m NLW increase and a further £4m business rates increase. The options for Greene King to reinvigorate earnings growth appear limited to the pace and shape of brand conversions, improvement in underlying trading and or acquisitions.
Rooney Anand has been CEO since May 2005 during which time the group has completed 10 acquisitions of varying shape and size. He has been at the group for almost 16 years and will be 53 this year. The group appointed a new chairman, Philip Yea, in May 2016 and there is an expectation in the market he will oversee a CEO succession in due course although there are no indications of any change in the short-term. Indeed there is perhaps more likelihood that Rooney will look to secure one last major acquisition before he retires. However, with the benefits of the Spirit acquisition as yet unproven, in our view, a major acquisition appears unlikely at this stage.