Greene King (GNK) Ord 12.5p
HL comment (30 April 2019)
Greene King's full year results are broadly in line with analyst expectations. However, recent good weather and the weak comparison due to last year's 'Beast from the East' meant some investors were hoping for more.
The shares fell 4.5% in early trading.
CEO Rooney Anand is passing the reins to former Merlin executive Nick Mackenzie in a matter of days. It won't be an easy act to follow, with profit more than doubling under Anand's watchful eye.
Things are looking tough at the moment though. The squeeze on real wages hit demand last year, and 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 added margin pressure raises questions about profits.
On the positive side, the group has a sterling track record when it comes to taking cost 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 disposal programme will 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. But there are undeniably headwinds ahead, and with Anand stepping down, we're more cautious on the stock than we have been in the past.
The shares currently trade on 10.8 times earnings, which is a touch above the longer term average. There's a prospective yield of 4.9% on offer, although of course there are no guarantees.
Like-for-like (LFL) sales in the Pub Company business were up 2.9%.The division saw strong drink volume growth, with drink-led pubs recording a LFL rise of 4.6%.
The warm weather, and a positive performance from country pub brand, Chef & Brewer, helped trading over the Easter period. LFLs were up 4.6% compared to last year.
The tenanted Pub Partners division saw net profit improve 1.6%. Brewing & Brands saw total beer volumes rise 0.9%, although own-brewed volumes were down 3.4%.
Greene King expects to limit cost inflation headwinds to between £10m - £20m for the year and is "broadly on track to deliver" its disposals programme for the year.
Full year underlying pre-tax profit is expected to be between £244m - £247m.
The group's made good progress on its debt refinancing plan, repaying 51%, or £393m, of the Spirit debenture.
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 disclosure for more information.
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