Leading sector analyst Geof Collyer expects Greene King to report “more than robust” results for its retail arm for the first quarter of its current financial year, ahead of its results on 3 September.
Issuing a Buy recommendation at a Target Price of 820p, Collyer, of Deutsche Bank, highlighted Greene King’s “strong trading performance” for the first eight weeks of FY2014, with like-for-like retail sales up +3.3% (vs. comp of +7.1%) and own-brewed volumes up +1.5% (vs. +2.7%).
“Although management remains cautious on the UK consumer and economic environment for FY’14, we believe that its business strategy has been specifically engineered to deliver value under such circumstances. Moreover, the relatively weaker retail comps for the latest 10 week period (+3.5%) due to Olympics should also benefit the results.
“With that confidence we expect the company to report more than robust trading performance for the first 18 weeks of FY’14 and to continue the trend for the coming quarters as well. The shares have dropped back 12% in the past few weeks. Next week should be a positive catalyst.”
On the retail estate, Collyer said: “Rebounding London and hot weather to result in strong growth. Recent industry data (Coffer Peach Business Tracker) suggests that the pub trading has benefitted from hot weather in July (managed pubs like-for-likes +2.9% with drink-led pubs +5.7%) and weaker comps are likely to continue in August.
“Though Greene King reported no significant impact from the Olympics last year, a rebound in the London market (from weak July and August in 2012) should have a positive impact on retail drinks sales as Greene King is the most exposed to this region of the major pub retailers. The aggregate of the first eight weeks this year and last year was +10.4%, so we are forecasting like-for-likes in the latest 10 week period to be c.6%, making +5.5% for the 18 week period.”
In the tenanted arm, he said that Greene King’s disposals and new agreements, in which the company has greater direct retail influence, have helped deliver improved segment performance with average EBITDA per pub up 5.1% for the first eight weeks of the year. “We expect this momentum to continue for rest of the year. Our like-for-like EBITDA forecast for the 18 week period is flat.”
Collyer said input cost inflation “remains a drag on margins” in the brewing division. “However, we expect the investment in the core brands to help drive volume growth, though at a slower pace than last year.”
