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Greene King - Record revenues, dividend ticks over

Nicholas Hyett | 29 June 2017 | A A A
Greene King - Record revenues, dividend ticks over

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Greene King Ord 12.5p

Sell: 849.30 | Buy: 849.30 | Change 0.10 (0.01%)
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Greene King saw full year revenues rise 6.9% to a record high of £2.2bn, with operating profit up 4.9% to £411.5m.

The full year dividend per share rose 3.6% in the year to 33.2p, with the shares broadly flat following the announcement.

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 the payout has grown every year for more than two decades.

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, which ranges from Hungry Horse and Flaming Grill to Loch Fyne and Wacky Warehouse, is being rationalised with very promising results.

However, the deal also means that the group is significantly more exposed to casual dining. It's a market which has seen rapid growth in recent years, and is expected to grow by 7.2% over the next few years, but competition is heating up. Not only is there an ever greater number of restaurants on offer, but the likes of Deliveroo and JustEat are grabbing a slice of the action too.

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, the brand migration strategy continues 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 shares currently trading on a price to earnings ratio of 9.5x, a near 10% discount to its historic average. The prospective yield is currently 4.9%.

Full year results

Greene King's core managed pub business saw like-for-like (LFL) growth of 1.5% following a good Christmas and strong fourth quarter. Revenues in the division rose 7.7% to £1.8bn, accounting for 82% of group sales and, at £308m, 75% of group profits.

Revenues from the group's 1,200 tenanted pubs grew 5.8% to £199m, with Brewing & Brand revenues up 1.7% to £200m. Profits from the two divisions were £92.8m and £31m respectively.

Integration of the Spirit Pubs, acquired in late 2015, is now complete, with £35m of synergies delivered, improved IT systems rolled out across 1,700 pubs and brand conversions achieving sales uplifts of over 30%.

Capital expenditure in the year was lower than last year at £126m, and is expected to be between £130-£145m a year for the next three years. Free cash flow after dividends and capex more than doubled to £119.6m, covering the group's debt service obligation and leaving the group's net debt at four times EBITDA (earnings before interest, tax, depreciation and amortisation).

Going forwards, the group will continue to focus on brand conversions to drive growth in a difficult market. The group is witnessing significant cost pressures, both from rising wages and inflationary pressure from the weaker pound.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.