Leading analyst Jamie Rollo at Morgan Stanley has forecast that Greene King will report H1 revenues of £906m (+47%), operating profit of £177m (+44%), PBT of £114m (+38%), and EPS of 32p (+6%), with the Spirit acquisition generating most of the growth, when it updates the market at the start of next month.
He said: “We think the company has a solid track record, an attractive pub estate and scope for large Spirit synergies, but facing a tough competitive landscape and possible dilution from pub sales, we rate the shares Equal-weight. We forecast 5% growth, giving an interim dividend of 8.35p and a full year dividend of 31.2p.”
Rollo expects Spirit to contribute c£50m EBIT, implying the original Greene King business will generate EBIT growth of 3%.
He said: “We look for an update on the Spirit integration (unlikely to get updated synergy targets at this time), and discussion of how Greene King will mitigate the NLW (we estimate a c. £12m annual impact, or 5% to PBT). Greene King trades on on 11.5x cal 16e P/E and 8.6x EV/EBITDA. As we set out in our recent note, we see the risk-reward as well-balanced.”
At the Q1 update, the company stated it remained confident of generating at least £30m of synergies from the Spirit acquisition.
Rollo said: “Our base case assumption is that the company achieves £55m of gross synergies over three years, or £45m net after reinvestment. The company may not update total synergy targets until the FY16 results, as it only completed on Spirit in the summer, but we still expect some initial commentary with these figures on what the company has found, any need for reinvestment or additional capex, and its confidence level in achieving its savings.
“Since completion, Greene King has announced it will keep the Spirit Burton head office open. We also look for an update on any fair value adjustments to Spirit’s assets, including how it accounts for onerous leases. This could have a small negative impact to forecasts as we currently assume no changes.”
The company has c. 45% of employees aged over 25, of which c. 25% are already paid above the NLW.
Rollo said: “This equates to c. 35% of employees that will see an increase in wages from April, but given training step-ups, not a full 7% impact. Assuming a 6% impact on 35% of staff costs leads to an estimated gross impact of £12m p.a., or 5% to group PBT. We look for an update on mitigation measures being taken by the company.
“For the full year, we forecast revenues of £2.06bn, operating profit of £379m, PBT of £236m, EPS of 64.0p and a dividend of 31.2p versus consensus of £2.07bn, £377m, £237m, 64.2p and 31.3p, respectively. We forecast Spirit’s FY16 EBIT contribution to be £114m, Greene King trades on 11.4x cal 16e P/E and 8.6x EV/EBITDA.”
