Leading analysts have given their view on Greene King’s trading update this morning.
Mark Irvine-Fortescue, of Panmure Gordon said: “We cut FY18 EPS by 6% on weaker LFL trends and are increasingly anxious that consumer demand softness is coming home to roost, an unwelcome bedfellow to existing supply-side pressures. With the exception of premium operators like Young’s, we feel investors are safest avoiding pub/restaurant value traps, and embracing the higher multiples accompanying selected growth companies in the sector (On the Beach, Merlin, Brighton Pier Group, Wizz Air Holdings and Young’s).”
He added: “For some time we have clung to a luke-warm BUY rating on the grounds of medium-term value, on the basis of an undemanding valuation with strong freehold backing, and a dividend prop supported by solid cash flow. A positive catalyst was always lacking and we now worry that the emerging catalyst is a negative one, pertaining to consumer demand. To date we believe the trading challenges in the pubs/restaurant space have been driven more by supply side issues (competition, labour and cost inflation), than consumer demand which, whilst weak in sentiment terms, had not been evidenced in sharply deteriorating leisure data. Pubs/restaurant industry growth of 1% (12m rolling Peach tracker) and 0.6% in July is hardly indicative of a collapsing consumer (August not yet available).
“However, softness seen first at weaker operators like Restaurant Group seems to be becoming more pervasive, as yesterday’s profit warning from Fulham Shore (Franco Manco pizza) and today’s GNK update bear testament to. We need more evidence to definitively call a negative inflection in consumer demand, but we are incrementally cautious and wonder if good June weather and pre-booked summer holidays (with associated GBP shocks) is a precursor to some belt-tightening. Each 1ppt on LFL has c.4% sensitivity to EPS. The dividend (2x covered with ND/EBITDA at 4x) and freehold backing should provide some downside support, but we feel it too early for value investors given negative earnings momentum and consumer macro clouds.”
Simon French at Cenkos said: “The performance of Pub Company is below our FY estimate of flat LFL sales and given the company’s caution around trading, weaker consumer confidence and increased costs and competition, we expect some downward pressure on consensus expectations of £270.3m (Cenkos: £265.1m), despite the group’s £45m cost savings remaining on track. Furthermore the read across to other pub companies will likely see weakening of their share prices. We think Wetherspoon (JD) remains the most vulnerable in an accelerating consumer downturn given its margin structure.”
Douglas Jack, of Peel Hunt, said: “Managed LFL trading deteriorated over the last eight weeks, when poor weather prevented the southern-orientated wet-led pubs from offsetting weak trade in the value food-led brands. As a consequence we are cutting our forecasts by 3%, but retain an Add recommendation due to the >5% dividend yield, but are wary that LFL sales traction will be needed before the cost mitigation opportunities start to run out (in 2019E).”