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Greene King - Strong end to a transformational year

Steve Clayton | 29 June 2016 | A A A
Greene King - Strong end to a transformational year

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Greene King saw its shares jump 4.5 % in early trading as full year results showed like-for-like (LFL) growth across all three operating divisions.

Including the effects of the Spirit acquisition earlier this year, adjusted earnings per share rose 14.6%, to 69.9p. A final dividend of 23.6p has been announced today, up 8.3% on a year previously, resulting in a 7.7% increase in the full year dividend.

Synergies from the Spirit acquisition hit £16.7m, versus a first year target of £12m, with integration of the tenanted and leased business ahead of schedule and integration of the managed business well underway. The group continues to expect total synergies of £35m by the end of 2017/18, with 80% to be delivered by the end of this financial year.

Pub Company - Managed

The group's managed Pub Company business saw LFL growth of 1.5% in the year, ahead of market growth of 1.3% - with the former Greene King Estate and Spirit Estates delivering growth of 1.9% and 1% respectively. However, combined operating margins fell by 1.4% as a result of the higher lease costs in the Spirit Estate and 0.3% contraction in margin at Greene King due to ongoing investment in the estate and staff.

Overall adjusted operating profits, including the impact of Spirit, rose 56.8% to £299.2m.

Pub Partners - Tenanted/Leased

LFL net income from the tenanted/leased business grew 2.7%, with average EBITDA increasing 14.3% per pub - reflecting the contribution of the Spirit Pubs, ongoing improvements in the quality of the estate and synergy contributions.

The former Greene King estate saw the number of pubs fall 5.9%, resulting in a 2.1% fall in revenues but helping to boost margins in the portfolio by 1.3%.

Adjusted operating profits rose 58% to £85.3m.

Brewing & Own Brand

Own-brewed volume rose 2.9% over the year with the group's share of the ale market rising 40 basis points to 10.5%. Revenues in the division rose 2.2%, with an improved operating margin (up 1.1%) resulting in an operating profit of £32.7m (up 9.7% on a year previously).

The margin increase was predominantly driven by new sales to Spirit managed pubs, Greene King IPA is now on sale in 90% of Spirit managed pubs but also benefitted from positive channel mix and additional cost efficiencies.

Outlook:

Pub Company trading for the first eight weeks of the current year has seen LFL sales up 2.8%, helped by the European Football Championships and better weather in May.

Although the company expects increased uncertainty around the UK's future withdrawal from the EU - with negative impacts on the economy and consumer confidence in the near term - it believes that its strong balance sheet and limited direct impact mean that it will be able to deliver further growth in earnings, returns and dividends.

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. The group has used the boost to earnings to improve dividend cover, whilst still offering shareholders an inflation-busting 7.7% increase for the full year.

Since CEO Rooney Anand took the reins in 2005 turnover and dividends per share have 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 1,062 to 1,740 as a result of the deal. However, the deal also means that the group is significantly more exposed to casual dining, a market with a strong growth record but which has seen a dramatic increase in competition in the last year.

Given the increased competition it's good to see the brand portfolio of the enlarged group being rationalised, with the group taking a "best of both" approach to combining the two businesses. 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 this looks like a good start for the combined group. Greene King is offering a yield of around 4% for the current year, and trades on a PE of 11.4x. With the dividend more than twice covered, prospects for growth look solid, assuming that is that the Brexit vote has the limited impact the group seems to expect.

All yield figures are variable and not guaranteed.

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.