We round-up the views of analysts at Hargreaves Lansdown, JP Morgan, Goodbody, Peel Hunt and Citi – with more than one believing the company’s shares are undervalued.
Nicholas Hyett at Hargreaves Lansdown said: “Greene King has an excellent dividend record. Since CEO Rooney Anand took the reins in 2005, turnover and dividends per share have doubled. In fact, strip out the impact of a tax-related rescheduling of dividends in 2008/09 and the payout hasn’t been cut in more than two decades.
“Despite a bumper summer, things are looking a bit tough at the moment. The squeeze on real wages hit demand last year. Plus an explosion in new casual dining venues means competition for a share of the public’s purse has rarely been higher. Add a whole raft of cost headwinds and a sizeable debt pile, and things aren’t looking quite as secure as they once did.
“In response, Greene King has upped investment in the estate, cut prices and increased marketing spend. Early signs suggest these efforts are delivering results for the top line, but the impact on margins remains unclear, and profits fell last year.
“On the positive side, the group has a sterling track record when it comes to taking costs out of the business. Brand consolidation, in a portfolio that stretches from Hungry Horse and Flaming Grill to Loch Fyne and Wacky Warehouse, should help boost returns from underperforming pubs. Meanwhile, a substantial pub disposal programme should help bring debt back under control. Those self-help measures could be crucial to weathering the growing storm.
“Greene King’s track record deserves recognition. That makes its current P/E Ratio of 7.6 times, versus a long term average of 10.2, something of a surprise - especially with a 7% yield. But there are undeniably headwinds ahead, and that makes us more cautious on the stock than we have been in the past.”
Alexander Mees at JP Morgan, said that while the boost to sales during the World Cup contributed to what was “undoubtedly a good start” to the year, the figures are set against a weak comparator of -1.2% over the same period last year, “and the nature of the contributing factors means the strong performance cannot be extrapolated for the balance of the year”.
“Our adjusted PBT estimate remains £244 million, in line with company-compiled consensus of £242 million. We see no let-up in cost inflation and remain wary of the pattern of consumer demand, particularly as the UK approaches the deadline for its exit from the EU.
“According to the Met Office, 2018 was the joint hottest summer on record for the UK and the hottest ever for England. It was also England’s longest run in a World Cup since 1990. Pubs benefitted from these factors, with wet-led pubs clearly benefitting far more than those with a heavy food-bias. As can be seen in the Peach Tracker data, restaurant groups saw a corresponding drop in performance over the summer. But good weather, to say nothing of sporting success, is fleeting and does not have any bearing on future trading patterns. We forecast +0.5% LFL sales growth in the year to April 2019, against -1.7% in FY18.
“Greene King’s wet-led and outdoor inclinations, as well as the later timing of its update, meant its trading statement makes for better reading than some of its peers, although it should be remembered that it was also coming up against generally weaker comps. More food-focused Mitchells & Butlers (Neutral), for example, recently reported +0.9% LFL sales growth for the 10-week period to 28 July, against a strong +2.6% comparator. Marston’s reported +5.0% LFL growth in wet-led Taverns, but -1.2% LFLs in food-led Destination & Premium in the 16 weeks in 21 July 2018.”
Paul Ruddy, gaming and leisure analyst at Goodbody, said that, overall, like-for-like sales were tracking ahead of its expectations (c.1%) for H1 which was encouraging.
“We would note that this was a very favourable period for the group, with a helpful weather tailwind and the benefit of England’s extended run to the semi-final of the World Cup. We still see meaningful year on year profit progression as challenging given the cost headwinds and estate disposal programme.
“We retain our cautious stance given the high absolute debt levels and limited free cash flow post dividend payments.
While a note from Citi: “Coffer Peach industry LFL has continued to track at around +1.2% implying that the group’s outperformance of the industry has improved from 100bp over the first 8 weeks to 200bp over the most recent 10 weeks. In FY18 the group underperformed the industry by 160bp so this marks a 360bp swing in relative performance.
“We think this reflects investments in value, service and quality (VSQ) as well as the group’s skew to pubs with outdoor space.
“We expect little change to consensus. Although the current trading is strong we expect investors will be mindful that trading was likely supported by the weather and it remains early in the year with risks around the UK consumer and Brexit.
“Nevertheless we expect the shares to respond positively to today’s news. We think the shares have been unfairly de-rated, and now trade on some of the most attractive multiples in the sector. We see the c.7% dividend yield as sustainable, with refinancing activity adding value and flexibility.”