Greene King - nothing that a hot summer can't fix

Greene King (GNK.L): Having been positive on Greene King as it moved up from 755p in December, now might be a good time to step aside for a while, with the shares at 850p. After a busy year, including the, recently approved, acquisition of the Spirit Pub Company, there suddenly seems to be a lot on management’s plate. In these annual results, to 3^rd May 2015, underlying revenue growth was 3.0%, but pre-tax profits edged lower by 0.8% to £168.5m. The results were held back though by the ongoing sales of ‘tail end’ pubs that were diluting overall returns. Excluding these, underlying pre-tax profits grew 6.9% to £167.0m. Underlying eps, at 61.0p, were up 1.3% (but up 9.2% based on the retained estate), whilst the total dividend was raised by 4.8% to 29.75p, in line with the targeted cover ratio of ‘around two times’.

Within these numbers, the dominant Retail division broke through the £1bn revenue mark (+5.9% underlying), but margins, whilst recovering from the first half, still slipped 40bps to 19.1%, to leave underlying operating profits up 3.6%. LFL sales grew at a tepid 0.4%, with the World Cup, Scottish drink drive laws and tougher comparatives all blamed in part. Pub Partners revenue was down 18.5% and operating profit down 17.3% as the estate shrank, with the LFL net income metric up 3.5%. For the continuing business of 881 pubs, operating margins edged up 70bps to 44.3%, with an average EBITDA of £69,900. Greene King notes that the Spirit deal will add 416 pubs to the estate with an average EBITDA of £77,000. The reduced number of pubs had a knock on effect to Brewing, with underlying EBITDA down 1.5% to £34.9m, despite some market share gains. Over the course of the year net debt fell by £66.9m to £1368.7m, which on EBITDA of £319m is a ratio of 4.3x. The new year has started ‘steadily’ with Retail LFL sales up 0.6% and Pub Partners LFL income up 1.2%, but Brewing volumes are down 3.7% due to tougher comparatives and export timing differences.

For FY16, consensus eps are 65p, a PE of 13.1x at 850p, indicating a dividend of 32p and a yield of 3.8%. These are not that demanding, but with the Spirit integration to execute and a lack of sales and revenue momentum at present, it feels like the shares may mark time for a while. There is nothing though that a hot summer can’t fix and as Britain swelters today in 30C plus heat, trading momentum this week should pick up nicely at least. (Neil Cumming^, 1^st July 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower