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Greene King - Sales bubble up on World Cup boost

Nicholas Hyett | 7 September 2018 | A A A
Greene King - Sales bubble up on World Cup boost

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Greene King Ord 12.5p

Sell: 849.30 | Buy: 849.30 | Change 0.10 (0.01%)
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A brief update on first quarter trading saw Greene King report a significant improvement in revenue growth in the managed pub business, although slower progress elsewhere.

The shares rose 11.1% in early trading.

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Our view

Greene King has an excellent dividend record. Since CEO Rooney Anand took the reins in 2005, turnover and dividends per share have doubled. In fact, strip out the impact of a tax-related rescheduling of dividends in 2008/09 and the payout hasn't been cut in more than two decades.

Despite a bumper summer, things are looking a bit tough at the moment. The squeeze on real wages hit demand last year. Plus an explosion in new casual dining venues means competition for a share of the public's purse has rarely been higher. Add 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 suggest these efforts are delivering results for the top line, but the impact on margins remains unclear, and profits fell last year.

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. Meanwhile, a substantial pub disposal programme should help bring debt back under control.

Those self-help measures could be crucial to weathering the growing storm.

Greene King's track record deserves recognition. That makes its current P/E Ratio of 7.6 times, versus a long term average of 10.2, something of a surprise - especially with a 7% yield. But there are undeniably headwinds ahead, and that makes us more cautious on the stock than we have been in the past.

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Q1 Trading Update

Pub Company reported like-for-like (LFL) growth of 2.8% for the first 18 weeks of the year, ahead of a 1.2% increase across the wider market. Growth over the most recent 10 weeks was even stronger at 3.2%.

Performance was boosted by good weather over the summer and England's successful World Cup run. The group sold 3.7m pints of beer during England's seven World Cup matches and LFL sales were up 61% on the day of the semi-final.

Tenanted pubs saw net profits sink 0.4% after 16 weeks, impacted by higher overhead costs - although these are expected to balance out over the year. Total beer volumes in Brewing & Brands were up 4.0% with own-brewed volumes up 0.3%.

Greene King's plans to offset gross cost inflation of around £45-50m with cost saving is on track. The company is also looking to reduce the cost of debt and increase financial flexibility through a refinancing.

The group plans to dispose of 100-110 pubs this year, while opening nine new pubs.

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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.

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.