Analysts corner – Citi on Greene King

Analysts at Citi have given their view Greene King, saying it believes the concerns around the share price are overdone.

The note reads:

“Share price weakness overdone - Refinancing adds value  Share price weakness overdone. Despite in line FY18 results and above market current trading Greene King’s share price has fallen c20% over the last month. Concerns remain around the sustainability of its LFL growth, the efficacy of its refinancing activity and the sustainability of its dividend. We are alive to the risks in the sector (hence our sell recommendations on EIGE, MAB & MARS) but think in the case of GNK these concerns are overstated.

“LFL now out-performing peers. GNK’s LFL underperformed the industry by 160bp last year but recent investments in value, service and quality (VSQ) have driven a step change in performance; LFL growth in May/June was 100bp above the industry at +2.2%. Recent good weather and easier comps through the remainder of the year should underpin our +2% LFL forecast.

“Refinancing is clearly NPV positive. Recent actions to refinance the Spirit Debenture, where interest costs were up to 10% into an RCF with an estimated 2.5% interest are clearly NPV positive in our view – we calculate a NPV at £60m. We expect management to continue to pursue this strategy to lower interest costs and increase financial flexibility.

“Dividend is sustainable. The group has a number of calls on its c£170m pa FCF. On our forecasts the group can comfortably fund its c£103m pa dividend and c£54m pa debt amortization. Even without assuming ongoing asset disposals we forecast a c£30m pa reduction in net debt. Scope for asset disposals, cash balances of £170m and £470m headroom on its combined RCFs provide ample contingency.

“Valuation remains unchallenging. The shares have fallen c20% since inline FY18 results and now trade at 8x FY19 PE vs an historic range of 6-14x (LT average 11x). We regard the dividend as secure and see the 6.4% dividend yield as an attractive support. We make minor changes to forecasts and retain our 730p target and Buy.”