Two leading analysts have upgraded their expectations for Greggs following upbeat interim management statement for the third quarter from the high street bakery group.
Sahill Shan, of N+1 said the Q3 update was “one of the most positive we have seen for some time”, while Clive Black of Shore Capital upgraded its full-year current pre-tax profit expectations up by c12% to £52.1m.
Shan described Greggs’ 5.4% like-for-like sales rise as “stellar”, and the company also said its full-year pre-tax profit will be “materially ahead” of management’s previous expectations.
“This prompts us to push through a FY14 PBT upgrade of 10.5% and 8.5%/3.5% for FY15/16.
“Trading under 6x EV/EBITDA and c13x P/E we continue to argue that the rating is cheap, particularly given the self‐help thesis momentum shown over last 12 months, an improving quality of estate profile and the possibility of net‐shop growth being resumed in the next 12‐18 months. We see fair value towards 7‐7.5x FY15 EV/EBITDA, implying a share price >650p.”
Shan said: “Q3 LFLs after 11 weeks were 5.4% implying a YTD showing of 3.9% vs. 3.2% H1. This is an outperformance vs. our FY14 LFL estimate of 2.9%. Admittedly the Q3 comp was a soft ‐1%, but this should not detract from a Jul‐Sept showing which has exceeded management’s own expectations. The update also cites total sales growth of 3.5%, 153 shop refits and 11 net closures YTD.”
He added: “Management now expects full‐year results to be materially ahead of its previous expectations. We lift our FY14 PBT by 10.5% to £54.5m, implying 35% cumulative increase since Jan‐14.
“The historical high was £53m in FY11. We now assume H2 LFLs of +3.1% vs. 2.5% previously and a full year EBIT margin of 6.9% vs. 6.3%. For reference our Q4 LFL assumption is c.1% owing to a stronger 2.6% comp. Our new FY14 PBT estimate is now equivalent to our previous FY16 estimate.
“As a reminder our FY15 estimates already include system improvement costs. Set against this is positive underlying trading momentum and c.£3m uplift from the annualisation of structural changes which should counter any drag from adverse weather. At this stage we feel factoring in y/y PBT growth of c2% on 2% LFL growth is reasonable. This implies a 8.5% upgrade for FY15.”
Meanwhile, Black of Shore Capital called the trading update “very welcome news from Newcastle!” and has upgraded the stock recommendation from Hold to Buy.
He said: “Total sales over the 11-week period increased 4.0%, with LFL revenues an excellent 5.4% higher. Whilst the delivery was against a -1.0% 2013 comparative, we highlight that all the negative trading was in July, and that the very positive trading through August and September to date has been against positive comparatives, so Greggs is delivering growth on growth, an encouraging performance. We are also encouraged that it is not just cash sales that are positive, with positive low single-digit volume growth aiding operational gearing in both Greggs’ stores and importantly the manufacturing facilities and supply chain.”
“We have upgraded our Greggs forecasts, taking our FY2014 CPTP from £46.4m to £52.1m, a c12% upgrade, with EPS of 39.3p, so 31% growth year-on-year from the challenged 2013 performance. Our forecasts will sit below consensus, as we exclude £1.4m of property profits from our continuing forecasts, a 12% increase in forecast. Our EBIT margin of 6.6% is still some way below the recent high of 7.9% reported in FY2010.”
“For FY2015, we balance the trading headwinds from the favourable weather and stronger-than-expected FY2014 LFL performance against the favourable food commodity and oil price environment, coupled with the annualised benefits from cost-savings initiatives, and we have upgraded our FY2015 CPTP forecast by c12% to £55.2m, EPS of 41.9p, so a c7% growth rate. We expect such stronger trading momentum to feed into cash generation, driven by the EBIT contribution and working capital benefits; we have raised our FY2014 year-end net cash estimate to £32.2m (from c£18m). Our analysis suggests cash will now build further in the future, exceeding £60m by end 2016. We note that historically Greggs has returned cash to shareholder when cash has exceeded £60m.”
“On our revised forecasts, Greggs’ stock is now trading on a 2014F PER of 15.2x and an EV/EBITDA multiple of 6.6x. We have also nudged up our DPS estimate for FY2014 to 20.5p, so c5% growth y-o-y with c6% growth in the final; we therefore forecast a 3.4% yield, 1.9x covered by EPS and 1.4x by free cash flow (post all capex).”
“With the materially improved trading momentum and the prospect of a favourable input cost environment, Shore Capital upgrades its recommendation on Greggs from Hold to BUY. Progress in FY2015 may be a little less dramatic, but with each update Greggs provides increasing evidence for sustainability of its in-store recovery, which underpins our expectation for further earnings and dividends growth, supported by building cash balances which materially boost the financial robustness of the group.”
