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Greene King - Festive Christmas in an otherwise bleak winter

Nicholas Hyett | 25 January 2018 | A A A
Greene King - Festive Christmas in an otherwise bleak winter

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Greene King Ord 12.5p

Sell: 849.30 | Buy: 849.30 | Change 0.10 (0.01%)
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The festive period was a welcome break in an otherwise bleak winter for Greene King. However, despite the positive Christmas and New Year, performance in the quarter was behind that reported at the half year stage.

The shares were down 0.9% in early trading.

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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.

However, things are looking a bit tough at the moment. The squeeze on real wages is hitting demand, while the explosion in new places to eat means competition for a share of the public's purse has rarely been higher. Add in a whole raft of cost headwinds and a sizeable debt pile, and things aren't looking quite as secure as they once did.

In response, Greene King has upped investment in the estate, cut prices and increased marketing spend. Early signs suggests these efforts are delivering results for the top line, but on the impact on margins means profits are falling.

On the positive side, the group has a sterling track record when it comes to taking costs out of the business. Brand consolidation, in a portfolio that stretches from Hungry Horse and Flaming Grill to Loch Fyne and Wacky Warehouse, should help boost returns from underperforming pubs. Those self-help measures could be crucial to weathering the growing storm.

Greene King's track record deserves recognition, and the 2015 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 8.2, a 20% discount to its historic average. The prospective yield is currently 6.1%.

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Third quarter trading update

The managed Pub Company business turned in a record breaking Christmas Day, with 154,000 meals served and sales of £7.6m, up 2.6% on last year. Sales over the two week period including Christmas and New Year were up 1.6% in the division.

However, this wasn't enough to offset the effect of snow and a weaker trading environment either side of the festive period.

Pub Company sales are down 1.4% so far this financial year, as food sales drag on performance. The tenanted Pub Partners business has seen profits rise 0.2%, while Brewing & Brands own-brewed volume is 0.9% behind last year, albeit ahead of a weaker ale market which is down 3.0%.

The group remains on course for £40-45m of cost savings this year, with the brand optimisation programme continuing to deliver returns of 25%. Both new build and disposal programmes are also on track with six new sites opened and 40 disposals completed in the year-to-date.

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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.