Two leading analysts have issued buy recommendations for Greene King after its £53.1m acquisition of Realpubs and a rise in full-year sales at its managed and leased divisions.
Geof Collyer at Deutsche Bank said like-for-likes (lfls) of +4.7% for the 51 weeks to 24 April 2011, against +3.6% in 2010, is “the best performance we have seen from a pub group”.
“Since the weather turned (at the 35 weekk stage) lfls have been +8.2%, but up against a comparative for Q4’10A of +1.7%. The divisional performance was driven by lfl food sales of +8.2% (vs. +8.8% in FY’10A) and +10.1% lfls in the group’s major food brand Hungry Horse.
“In tenancies, lfl profits have risen for the fifth quarter in a row. We estimate that Q4 was +1.6% vs. +0.6% for the 9 month period. Total group Brewing volumes were +2.0%, with own-brewed volumes -2.5%. This is an improvement on the -3.3% last given (9mths) and reflects a broadly flat performance since week 35.”
Collyer added: “The group has bought Real Pubs Ltd for £53.1m. This reflects a proforma CY’11E multiple of 8.3x. Including previously acquired pubs since the 2009 rights issue, GNK has now bought at least 25 London freeholds for a double-digit yield. These are big turnover sites - average weekly turnover around 70% above last year’s group retail average, and operating off a house ebitda margin some 650 bps higher than GNK’s retail average.”
He said that because of the “better than expected” lfls, along with the Realpubs acquisition, “we have raised our forecasts by around 2% at the EBITA, PBT and EPS levels for FY’11E, ‘12E & 13E. We have maintained our 635p price target, which offers 35% upside from the current share price.
“Given the group’s continual reinvestment and M&A activity throughout the past 3-4 years, we see GNK as having the greatest element of ‘pent-up’ performance to come through once the economy turns amongst major quoted pub groups.”
Simon French at Panmure Leisure described the trading update as “very strong” and said: “We retain our buy recommendation and 520p price target”.
“We currently forecast a 7.2% CAGR (Compound Annual Growth Rate) in EPS over the next three years and forecast £137.0m PBT (46.9p EPS) in FY 2011E slightly below consensus estimates of £138.0m PBT (47.3p EPS) and we expect consensus to increase to c£140m PBT on the back of today’s update. We will also update our FY 2012-13 forecasts in due course following today’s acquisition announcement.
On valuations, French said: “The stock is inexpensive, in our view, trading on a CY 2011E P/E of 9.7x and an adjusted EV/EBITDAR of 8.7x. The yield of 5.2% is attractive and covered c2x by earnings. Our 520p target price is predicated on a CY 2011E adjusted EV/EBITDAR of 9.0x and equates to a CY 2011E P/E of 10.7x.”
Meanwhile, Douglas Jack at Numis upgraded forecasts for Greene King by 1% and target price from 525p to 540p. In the English managed pubs division, Jack said: “With cost savings exceeding cost inflation (by an estimated £0.5m), LFL sales were the dominant factor behind our estimate of a 80bps rise in margins.”
On the Realpubs acquisition, he said: “Forecast outlet EBITDA is £6.3m, implying an acquisition multiple of 8.4x. This should be not double-counted in forecasts, which assume that Greene King will acquire 30 pubs pa in achieving its target having 1,100 managed pubs.”
Jack added: “We are upgrading our forecasts, reflecting managed pub LFL trading being the ahead of previous expectations: 1. 2011E PBT from £138.8m to £140.0m (consensus £139.3m); 2. 2012E PBT from £148.4m to £149.2m (consensus £147.2m); 3. 2013E PBT from £155.2m to £157.3m (consensus £155.6m).
“Offering a combination of double-digit earnings growth and a 4.8% dividend yield, we believe the shares are attractive on an 10.5% equity free cash flow yield. We believe this trading update has a clear, positive read-through to the other residential managed pub companies/regional brewers.”
