Leading analysts Douglas Jack and Simon French have reiterated their Hold recommendations for Greene King following its Q1 interim management statement yesterday.
Jack, at Numis, said: “We are holding our 2014E forecasts (PBT £171.3m; consensus £171.8m), but believe upgrades are possible later in the year. Weather-related comps will be easy for the majority of the financial year.
“We view the calendar 10.5x EV/EBITDAR valuation as fair owing to the potential for earnings upgrades later in the year. This valuation compares to 9.7x for Marston’s (ADD; TP 185p), 9.9x for Mitchells & Butlers (ADD; TP 500p) and 11.8x for The Restaurant Group (REDUCE; TP 400p). We believe all these companies are capable of generating c.10% earnings growth in 2014E.”
Greene King’s 4.6% rise in managed like-for-likes over the 18 weeks to 1 September compare to Jack’s 2.6% assumption for the full year. “Although drink sales (+3.7%), in particular, were boosted by better weather, it is encouraging that food (+5.7%) and accommodation (+6.0%) grew strongly.
“To us, this suggests that trading momentum should continue, supported by easier comps (Q2 3.0%; Q3 2.6%; Q4 -1.4%).”
Jack said he believed that managed margins should rise in Q1 due to higher like-for-like sales and faster expansion (a net 42 sites in 2014E against 33 last year). “Margins rose 80bps last year despite £4.0m of cost inflation, net of cost mitigation, and LFL sales rising 2.3%. In 2014E, net cost inflation is expected to be £4.1m and LFL sales should be higher.”
“Tenanted average EBITDA rose 5.8% over the first 16 weeks (in line with our full year assumption). LFL EBITDA rose 2.7%, a good step up, having been flat for the last three years. Average beer volumes were up (boosted by favourable weather) as was rent (an ongoing trend). The pace of disposals has picked up: 45 pubs sold over the first 18 weeks of 2014E; on track for 130 over the full year vs 103 last year.”
French, of Panmure Gordon, described Greene King’s IMS as “solid”, with like-for-like retail sales of 4.6% comparing to his forecast of c5% and implying c5.6% in the last 10 weeks.
“We expect no change to consensus forecasts of £171m PBT (60.5p EPS). Therefore, given the valuation of CY 2014E adjusted EV/EBITDAR of 10.0x we reiterate our Hold recommendation and 750p Target Price.”
He added: “The group comments that is seeing indications of growing consumer confidence and looks forward to another successful year. We think trading for the remainder of the year should be solid reflecting the benefits of reshaping the estate towards food-led managed pubs in London and the South East.”
