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Greene King - Strong spirits

Steve Clayton | 2 December 2015 | A A A
Greene King - Strong spirits

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Greene King Ord 12.5p

Sell: 849.30 | Buy: 849.30 | Change 0.10 (0.01%)
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Interim results from Greene King are the first numbers to be reported since the group completed the acquisition of Spirit. The headline figures show increases of 49% in sales and 47% in profits before tax, largely due to the impact of the acquisition. Earnings per share rise by 15% to 34.5p and the dividend rises by 6% to 8.45p per share.

The market has responded very positively, pushing the stock over 6% higher in early trading.

Strip out the impact of Spirit and the numbers are still positive, with the original Greene King business increasing sales by 5.4% and profit before tax by 5.9%. Like for Like sales in Greene King Retail were up 2%, Spirit Managed LFL sales were up by 1.2% and Pub Partners LFL net income was up 2.4%. Brewing volumes of Greene King's own brands were up 3.6%.

Integration of Spirit is said to be running ahead of schedule and the group has increased its cost synergy expectations to at least £35m, with £12m to be achieved in the current year. The brand portfolio of the enlarged group will be rationalised, with the group taking a "best of both" approach to combining the two businesses.

Our View:

Greene King has a great track record of dividend growth and the Spirit deal appears to be sowing the seeds for this to continue a while longer, with the group using the boost to earnings to improve dividend cover, whilst still paying an inflation-busting 6% increase to shareholders.

Since CEO Rooney Anand took the reins in 2005 turnover and dividends per share have almost doubled. Indeed, strip out the impact of a tax-related rescheduling of dividends in 2008/09 and dividends have grown every year since at least 1995.

The acquisition of Spirit has given the group a step-change in scale and increased the exposure to managed houses and the South of the country, including the fabulous Taylor Walker estate in London. Managed pub numbers have increased from 1,064 to 1,548 as a result of the deal. The group is thus ever more exposed to casual dining, which is a market with a strong growth record as Britons eat fewer meals in the home.

The integration benefits are coming in stronger than first planned, though to be fair, the expected level of incremental capital investment also looks to be a little higher too, at £40-50m per annum over the next three years or so. Overall though, this looks like a positive start for the enlarged group, and management comments about a strong increase in Christmas bookings can only encourage.

Margins were squeezed slightly in the existing estate in the first half, as the group invested in staff pay rates and customer service. The group estimates the National Living Wage will cost up to £6m a year once fully adopted. In the context of a group with expected future profits of over £400m per annum by that time, no-one should be too alarmed about this cost.

Greene King is currently offering a yield of circa 3.7% for the current year, and trades on a PE of 13.3x, before analysts make any adjustments to their numbers to reflect the improved guidance on cost synergies. With the dividend more than twice covered, prospects for growth look solid in a still improving UK economy.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.