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Greene King - Record revenues, but hangover looming

Equity research team | 30 November 2016 | A A A
Greene King - Record revenues, but hangover looming

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Greene King Ord 12.5p

Sell: 849.30 | Buy: 849.30 | Change 0.10 (0.01%)
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Record revenues, but hangover looming

Half year revenues passed the £1bn for the first time at Greene King, driven by organic growth and an additional seven weeks of trading at Spirit. Adjusted profits before tax rose 14.6% with adjusted earnings per share (EPS) up 4.3%. The interim dividend rose 4.1% to 8.8p per share.

The shares rose 0.8% in morning trading.

Our View

Greene King has a great track record of dividend growth. 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 in 2015 has proven a step-change in scale, with increased the exposure to managed houses and South of England, including the fabulous Taylor Walker estate in London. The group has been doing a sterling job of reducing costs in the combined business, while the brand portfolio of the enlarged group is being rationalised with very promising results.

However, the deal also means that the group is significantly more exposed to casual dining, a market with a strong growth record but which continues to see intense competition. That has already proven a serious headwind for some weaker players.

Nor are these the only headwinds facing the group. Greene King expects deteriorating economic conditions and continuing cost pressures to add to the challenges it faces next year. Fortunately Spirit, and in particular the brand migration strategy, continue to offer self-help opportunities not available to others in the industry.

Greene King's track record deserves recognition, and the Spirit acquisition has further strengthened the group. However, there are undeniably headwinds ahead, and that makes us more cautious on the stock than we have been in the past. It's a view that seems to be shared by the wider market, with the stock currently trading on a price to earnings ratio of 9.6x, 11% below to its historic average. The stock offers a prospective yield of 4.7%.

Half year results:

The group saw particularly strong growth in its Pub Partners (tenanted and leased) business, where adjusted operating profit grew 19.1% compared to growth of 12.4% in the managed Pub Company division. Sales in Brewing and Brands fell slightly, although profits edged up.

The group continues to make significant headway on the integration of Spirit. Synergies are expected to cross the £30m mark a year ahead of schedule, with an overall target of £35m by the end of 2018. The group is also in the process of reducing the number of brands it operates from 20 to 10. 50 pubs have seen their branding change this half, resulting in an average sales uplift at those sites of 30%.

Consumer spending on eating out continues to be ahead of last year, although much of that is driven by the growth in branded dining sites. However, Greene King expect the economy to weaken going forwards, with a negative impact on discretionary spending.

Restrictions on immigration could also have a negative impact on the sector going forwards, adding to increased wage pressures as a result of the National Living Wage.

Net debt increased 5.8% in the year to £2.2bn, equivalent to 4.2x EBITDA.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.