Analysts Corner: JP Morgan and Goodbody on Greene King

Alexander Mees, JP Morgan, said: “The weather impacted trading materially over the last quarter, excluding the impact of snow, LFL sales were -1.2%. Food-led pubs were particularly impacted by the weather, with both drink and accommodation LFL sales ahead of last year. Q4 continued the trend of poor performance from Q1-3 (with estimated LFL sales of -3% in Q4). Greene King reported that Adj PBT for FY18e will be in the range of £240m-£245m (vs. JPMe £237.8m). Trading over Easter weekend picked up, with LFL sales growth of 2.8% y/y.

Under-performing the market

“We recognise Greene King has underperformed the UK pub market over the period YTD, with -1.2% LFL sales (ex-snow). The wider UK managed pub market recorded average LFL sales growth of +0.7% in the 10-month period of May-17 to Feb-18, according to the Coffer Peach Tracker.

Across the group

“LFL net profit in Pub Partners was -0.3%, whilst own-brewed volumes in Brewing & Brands was -0.7% vs. JPMe of +0.3% (but ahead of a UK ale market which contracted by -3.1%).

Cost savings and investments

“Greene King reports it remains on track to deliver targeted cost savings of £40-45m, and the targeted £10m investment made in “value for money, customer service, and quality” has started to have a positive impact on trading. Disposal proceeds are expected to be ahead of expectations at c.£120m (vs. JPMe £100m), after the sale of three high-value leasehold pubs. Greene King opened 9 new pubs during the year, and invested core and brand conversion capex in 292 pubs. The exit from Fayre & Square is expected to complete by the end of the financial year.

Investment Thesis

“Our price target remains 500p dated December 2018. Our rating remains Underweight. We expect the impact of higher input costs, labour and utilities to weigh heavily on Greene King during 2018. The company itself does not expect to be able to mitigate all of the cost headwinds it faces. More worryingly, perhaps, is Greene King’s persistent underperformance of the market’s LFL sales growth in recent months.

“It appears that aggressive discounting is impacting LFLs and margins, particularly at its value brands. We expect Greene King to do what it can to pull customers in and hold onto price - its recent £10 million investment into a value, service and quality (VSQ) is indicative of this – but it will take time. We cannot see Greene King’s shares outperforming the market in this environment.”

Brian Devitt, Goodbody, said: “Pub company like-for-likes were -1.8% yoy, compared to our forecast of -1.5%. Management estimates that excluding the impact of snow, lfl sales would have been -1.2% yoy. The statement notes that Easter trading was strong with lfls +2.8% yoy and the £10m VSQ investment made at the beginning of H2 has started to positively impact on trading despite the continued challenging market backdrop.

“The group remains on track to deliver £40-45m of cost savings this year and disposal proceeds are expected to come in at £120m (Goodbody: £100m) due to the sale of three high value leasehold pubs. Management expects FY PBTe to come in at £240-245m (Goodbody: £240m; consensus: £242m).

“Overall this is a mixed update from Greene King. In terms of positives, we see two including: (i) despite the bad weather the group has managed to meet consensus and (ii) disposal proceeds will come in £20m ahead of expectations. However, all KPIs continue to trend in negative territory and looking into FY19, with another round of material cost headwinds coming, consensus expectations for small profit growth next year could come under pressure.”