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Greene King - Growth slows despite strong Christmas

Equity research team | 10 February 2017 | A A A
Greene King - Growth slows despite strong Christmas

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Greene King Ord 12.5p

Sell: 849.30 | Buy: 849.30 | Change 0.10 (0.01%)
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Like-for-like sales were up 4.5% over the three week Christmas period, with Christmas Day sales up 6%. Sales growth was particularly strong in London. However, a weaker November and December meant that overall growth in both the managed and tenanted businesses slowed compared to earlier in the year.

The shares fell 1.1% in early 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 exposure to managed houses and the 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 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, 10% belowits historic average. The stock offers a prospective yield of 4.9%.

Third quarter results

Like-for-like sales across Greene King's managed pubs increased 1.1% year to date (HY: 1.3%), with net income from tenanted pubs up 3.5% (HY: 4.2%). The group's own brand brewing operations saw sales decline 4.2% (HY: -0.6%), versus a 3.8% fall in the wider market. The group has acquired 11 new pubs so far this year, while disposing of 59 pubs across both the managed and tenanted business for total proceeds of £35m. Greene King expect to dispose of another 50-60 this year, raising total proceeds of £30-40m.

Integration of the Spirit business continues, with over 1,000 pubs now converted to the 'best of both' IT system with ongoing savings realised.

The group sees economic uncertainty and significant cost pressures in the coming year, but expect to be able to continue delivering ""progress, value creation and returns for shareholders"".

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.