M&C Report takes a closer look at Greene King’s results for the 52 weeks to 1 May 2011: Retail: expansion and transfers The net size of the division increased from 888 to 915 sites during the period. This included 39 transfers from Pub Partners and a “small number” of disposals, mainly from the value high street segment. The company also exchanged on eight greenfield sites. A net acquisition cost of the acquired sites was £130.7m and they are expected to deliver average Ebitda per site of £436.4k - more than double the estate average. Overall, Greene King is “on track” to reach its aim of expanding Retail to 1,100 sites and reducing its tenanted and leased estate to 1,200. Retail: Realpubs to expand outside of the South East “There are at least 20 Greene King sites that I think we can convert to the Realpubs concept,” chief executive Rooney Anand told M&C Report. The company has identified seven in London and 10 to 15 outside of the capital. Greene King plans to acquire additional sites for Realpubs, which it bought in April for £52.2m, and he stressed that expansion won’t be limited to its heartland. “London, particularly the north and west, is made for that sort of demography [suited to Realpubs]. But that isn’t to say it can only work in London and the South East. We have sites in well-heeled areas in other parts of the UK.” Retailer: Cloverleaf plans Greene King said a further 10 Cloverleaf sites are in the pipeline to open by the end of the 2013 trading year at a cost of c.£25m. The new sites are expected to generate more Ebitda per site than the average of the existing 12 outlets. The company bought Cloverleaf for £55.7m in January 2011 on an annualised outlet Ebitda multiple of 8.7x. Retail: food Food sales were up £13m to £263m, with like-for-like food sales growth of 8.1%, aided by the acquisition of food-lead businesses, chiefly Cloverleaf. Food-related sales were 60%, with direct food sales of 40%; chief executive Rooney Anand told M&C Report he “wouldn’t be surprised” if the company could achieve food-related sales of 75% and direct food sales of 50%, although he stressed that there’s no specific target in mind. More than 36m meals, of which two million were fish and chips, were sold in the period. Rising food costs have been offset by a move to central distribution in its Local Pubs section. Retail: Destination Pubs Of the brands in the Destination Pubs section, Hungry Horse saw like-for-like sales increase more than 10% for the third year running, with average weekly turnover up 7% to £19,000. Cover growth was up 17% and further dish innovations included the “Leaning Tower of Pizza Burger”. Average weekly turnover at Old English Inns grew 6.6% to £18,000. Food covers were up 12%. Meanwhile, Greene King plans to expand its mid-market family dining brand Eating Inn from 14 to 33 sites this year. Food accounts for 68% of sales at Eating Inn. Like-for-likes in Loch Fyne were “slightly down”. However, a loyalty card scheme in the restaurants has seen an average of 300 customers sign up per site, of which 72% are new to the database. Belhaven Retail saw a 4.1% rise in like-for-like sales, with coffee sales up a huge 71%, wine sales up 6.4% and food growing 130bps to more than 30% of sales. Retail: Local Pubs In its Value segment, trading hours were extended and more value offers saw total food spend per head fall 7% to below £5, with covers up 32%. In Mainstream, spending per head was flat at just over £6 and food covers increased; innovations in the segment included lunchtime meal deals, improved mystery guest scores and increasing the amount of fresh food on the menu. Greene King’s Premium segment (excluding Realpubs) also saw spending flat at £8 with covers growing 9%, with the company citing a revamp of its operating policies, improved service standards, more world beers and the roll out of Illy coffee. Premium now accounts for 40% of Local Pubs sales, with food up to 28% of sales. Pub Partners: innovations Blueprint, Greene King’s franchise-style agreement launched in the spring, is delivering annual profit increases per site of £65,000 to £70,000. Two other new agreements launched in the period: Business Builder, where lower wholesale prices are offered under determined circumstances; and Local Hero, where licensees are offered a discount on rent and beer and pay a percentage royalty on net turnover. Greene King said 60 of these three agreements are currently in place, with a further 150 planned for the new financial year. “This would take the share of the core estate under an element of Greene King control to almost 20%.” Anand said the type of people attracted to Blueprint have been “more entrepreneurial” than most people looking for a pub; they are keen to make money and sell on the franchise at some point. Other innovations highlighted by the company include its mystery customer programme called Missing Something and the introduction of a diploma for its business development managers in multi-unit leadership in conjunction with Birmingham City University. “The first group of our BDMs, across England and Scotland, have already started using their learnings from the course to improve their ways of working and effectiveness in the business, to the benefit of our licensees,” the company said. Pub Partners: investments Greene King’s investment in the division increased 33% to £16.3m. Provision of food has been a particular focus, along with improving the external decor and internal facilities generally. Average return on expansionary capital was 37%. Pub Partners: recruitment and retention Greene King was receiving seven enquiries for each vacancy in its English estate the year-end, up from four at the end of the first half. The company said: “In addition licensee churn fell 6%. In Belhaven, seven pubs were “closed for reopening” at the year end, with 76 tenancy at will agreements in place, and bad debt as 0.7% of sales. “We have up weighted our recruitment team and campaigns, with particular focus on our online programme, and we have toughened the recruitment process, including holding final interviews for every prospective licensee with an operations director and delivering mandatory training for all new licensees.” Brewing: investment Total investment in its brands for the year was £6.8m, which includes the launch of the £1m media campaign for IPA “Man Deserves a Proper Pint”, which is expected to reach 14m people through the national press and targeted men’s magazines. There was also an increase in ad spend for Belhaven Best, with a new TV advertising campaign. IPA is the official beer of English rugby, while Old Speckled Hen sponsors prime time on Dave. Belhaven Anand called the Scottish business “a great success story for Greene King”, with profits up 77% since its acquisition in 2005. Main activities in this period include opening its new brewhouse in May 2011 and buying another four Retail pubs. Company capex and disposals Capital expenditure, excluding investment in acquired sites, was £71.9m, “slightly ahead of last year”. It involved 383 schemes and delivered a return on investment in excess of 20% in Retail and over 30% in Pub Partners. Greene King disposed 108 trading and non-trading assets, realising £27.8m net proceeds at a net profit of £3.6m over book value. “The disposed and transferred pubs would have delivered an annualised Ebitda of £1.2m in Pub Partners. These actions helped to increase group ROCE by 40bps over the last year.” Current trading and outlook In the first eight weeks of the current financial year, Retail like-for-like sales grew 1%, with underlying growth, excluding the impact of last year’s World Cup, at 3%. Pub Partners average Ebitda per pub growth is 1%, with like-for-like Ebitda down 1%. Core brand own-brewed beer volumes declined 2%. Anand said: “Trading conditions in this calendar year have been variable and recently this has been even more pronounced. As we have previously reported, April was unusually strong. Consumers then reined in their expenditure in May. June has seen more normalised trading, notwithstanding the tough comparatives with last year’s World Cup.” He predicted a “challenging” year ahead as continued high inflation and the impact of Government cuts limit consumer spending power. Debt and financing At the year end, £110m of Greene King’s £400m five-year revolving credit facility, starting from April 2011, had been drawn. Net debt at the end of the period was £1,410.2m, up £62.1m from the previous year end, after the £131.2m investment in the Retail division. Exceptional item Exceptional charges totalled £23.3m. This included an impairment charge of £29.4m after a review of the pubs at the “tail” of its estate. Profit over book value on disposed pubs and other properties was £3.6m and there was a one-off £5.5m gain for a pensions credit. Charges for restructuring were £2.9m. Earnings per share and dividends Earnings per share were up 11.1% to 48.2p. The board recommended a final dividend of 16.8p per share, up 7.7% on last year. This takes the total dividend for the year to 23.1p per share, up 7.4%. Analyst reaction Douglas Jack at Numis said: “Despite recent weakness in trading, our stance is Add, reflecting: an undemanding valuation of 8.4x EV/Ebitda, 10% equity free cash flow yield and 4.7% dividend yield (all 2012E); a progressive dividend policy (up 7.4% in 2011) backed up potential to generate double-digit earnings growth. We are holding our forecasts and retaining our Add recommendation, reflecting growth/dividend prospects and an undemanding valuation.” Simon French at Panmure Gordon said: “Current trading is solid, in our view, with LFL sales growth of 1% in managed pubs (3% on an underlying basis excluding the World Cup). In tenanted and leased pubs, average Ebitda per pub is up 1% but down 1% on a LFL basis and own-brewed volume is - 2%. We currently forecast £148.0m PBT (50.7p EPS) compared to consensus estimates of £148.7m PBT (51.2p EPS). On this basis the valuation appears undemanding on a CY 2011E P/E of 10.4x and an adj EV/Ebitdar of 8.9x supported by a 4.9% yield. We reiterate our Buy recommendation and 540p TP.”

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