Analysts corner: Greene King

JP Morgan Cazenove said the acceleration of like-for-like sales growth in the Pub Company, since the six month update, indicates the company’s strategy of driving demand through an investment in quality, service and value is paying off. It said it remained cautious “on the sustainability of outperformance”, but saw this performance as a good one.

“Greene King has expressed confidence in its outlook for the rest of the year, while sounding a note of caution about the direction of consumer spending given the political backdrop,” said the note from JP Morgan.

“We forecast operating margins of 16.7% for the full year, down from 17.1% in FY18. In our opinion, the underlying operating leverage from good LFL growth is being given away through price investment. Nonetheless, our estimates are slightly above Bloomberg consensus (FY19E EBIT: £372 million, Bloomberg: £368 million) and we’d expect the market to take today’s update well.”

Goodbody said that while the two-week period over Christmas has been very strong for the Greene King, as well as other pub operators, it would highlight that although the 10.9% lfl growth rate is very impressive it is lapping a snow-impacted period last year.

“On the outlook for the FY, management noted: “while the ongoing uncertainty around Brexit may still have an impact on consumer confidence and spending during the year, we remain confident of our outlook for the financial year”. We are unlikely to make any material changes to our full year forecast on the back of this update.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said the bumper Christmas period provided a welcome boost to sales for Greene King. “The recent trend for eating out on Christmas Day seems to have continued this again this year, with the public handing over £7.7m on the big day itself,” he said.

“It’s worth noting that cost inflation means profit growth may not keep pace with sales this year, despite Rooney Anand’s corporate self-help measures, and the group’s tenanted estate has seen profit shrink year to date. Nonetheless these are certainly healthy numbers from the pub group, and will leave investors breathing a sigh of relief.”

Liberum said while Christmas trading was boosted by the favourable calendar and more benign weather conditions, it was encouraged by the consistency of the trading patterns with improvements in both drink and food sales and with all brands now in growth.

“We are upgrading forecasts (PBT) by a small but significant 1.0%, held back only by the uncertainty of Brexit, and believe further upgrade potential remains,” said the note. “This is the first time we have upgraded numbers in several years and moves 2019 PBT into growth versus 2018,” it added.

Liberum said it expected January trade to be muted, as more people embrace dry/vegan January, “but nevertheless the outlook remains confident”. “We raise our Pub Company LFL sales growth assumption from 1.5% to 2.2%, which effectively allows for a flat Q4. This seems more than achievable given the current run rate and weather effected comparatives, but allows for Brexit uncertainty.”