Peel Hunt analysts Douglas Jack and Ivor Jones have given their predictions for Greene King’s preliminary results next week. They expect to see managed pub trading returning to positive trading and signs that its wet-led pubs are receiving a boost from the weather and World Cup.
The note says: “Growth could soon return For Thursday’s prelims, we forecast PBT falling by 11% to £244.2m (consensus: £243.4m). We expect managed pub trading to be positive in early 2019E, resulting in 2019E forecasts being maintained. The shares have bounced almost 40% from hugely oversold levels, in our view, yet the EV/EBITDA, at 8x, is not onerous. We believe the attraction of the shares is the secure dividend, net debt reduction and expectations of growth returning in 2019E, and are increasing our target price to 700p from 600p.
“Managed LFL sales fell by 1.8% after 49 weeks. Other than snow/cold winter weather, we believe LFL sales were undermined by increased exposure to destination food and more capital than was originally expected diverting into back-of-house infrastructure (rather than customer-facing projects) in the Spirit estate.
“Encouraging start to 2019E. Early 2019E trading should have benefited from 2018E’s repositioning work in the Spirit estate, including the completed exit from Fayre and Square, and good weather in May/June. For GNK, Easter weekend LFL sales were up 2.8%; for the pubs constituent of the Coffer Peach Business Tracker, LFL sales bounced up to +3.5% in May vs +0.2% in the year to April 2018.
“The World Cup should also help early 2019E, however, we expect this to be more beneficial in the tenanted estate (in which only 23% of outlets are food-led, according to CGA) than the managed estate (57% food-led). Wetled pubs should also be the greatest beneficiary if this favourable summer weather continues (as the Met Office forecasts). There is a good chance of tenanted pubs bettering 2018E’s -0.3% LFL profit and brewing own-brewed returning to growth.
“We expect to hold our 2019E PBT forecast, which, at £251m, is ahead of consensus (£241m). This assumes stable profitability in the managed estate based on 1.4% LFL sales being just sufficient to offset cost inflation, post mitigation. Managed LFL sales are critical to forecasts: we estimate that each 1% change alters PBT by £10m or 4%. Thus, investors should respond positively if underlying LFL sales trends are improving. The EV/EBITDA valuation is 1.0 turn lower, at 8.2x, than a 10-year historical average that includes a financial crisis and recession. In comparison, if managed LFL sales can exceed 1% in 2019E, the combination of profit growth, dividend and net debt reduction should return.”
