Leading analyst Douglas Jack has upgraded his recommendation for Greene King to Buy to reflect faster expansion and progress with the company’s repositioning towards food-led managed pubs.
Jack, of Numis, who set a Target Price of 975p for the brewer and pub operator, said he expects growth to be “muted” in 2015, “a year in which all the company’s divisions face tough comps (particularly in Q1), and the dilution from the disposal to Hawthorne Leisure should have its maximum impact”.
“However, we believe the long-term strategy is right and would now use recent weakness as a buying opportunity.”
He added: “We expect to hold our 2015E forecast of 4% PBT growth (£180.3m; consensus £179.8m), vs. 8% recent annual historic average. The limited growth in 2015E reflects 3% dilution from the Hawthorn Leisure disposal and 2.5% dilution from the 53rd week in the comp. We believe this has now been priced in; we are upgrading to Buy to reflect faster expansion and progress with the company’s repositioning towards food-led managed pubs.”
Jack said the Q1 like-for-like- managed sales growth comparison of 4.6% is “challenging”, with growth of just 1.1% during the first eight weeks.
“During the summer months, sector LFL sales tend to be more correlated to weather than consumer confidence. Although this summer has been good, May-July experienced 4% less sunshine and 7% more rainfall than last year.
“We expect to maintain our 2% full year LFL sales assumption. The company achieved 4.1% in 2014 (vs. 2.3% in 2013), encouragingly with food (+5%) and accommodation (+6.8%) continuing to outperform drink (+3.2%). These underlying trends indicate that LFL sales should pick up in Q2 and Q3, when comps ease (to 2.5% and 4.4%, respectively) and the weather becomes less influential.”
He expects managed expansion to peak this year.
“Whereas 48 new managed pubs opened in 2014; 2015E guidance is for 68 new sites (30-40 new builds, mostly Farmhouse Inns and Hungry Horse; 10-20 single sites; 10-20 leaseholds, mostly Hungry Horse in leisure parks; and 5-10 transfers from tenanted). This, combined with falling food price inflation, should support margins.”
He expects average tenanted profits to rise 9% this year due to ongoing tail-end disposals and the sale of 275 third-quartile pubs to Hawthorn Leisure for 6.1x EBITDA in May. Jack also pointed out that tenanted core LFL net income rose 3.5% during the first eight weeks, ahead of his 1.5% FY assumption.
“In Brewing, own-brewed volumes were up 6.2% during the first eight weeks, driven by World Cup take-home sales, ahead of our 1% FY assumption,” Jack added.
