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A Greene light to buy

Greene King's moves upmarket look set to revive the pubs operator's great long-term record
July 5, 2012

Like many of its rivals, pubs group Greene King hit a bump in the road when the credit crunch struck – enough to break a 44-year record of year-on-year earnings growth. But the Hungry Horse operater and brewer of Old Speckled Hen seems back on the growth track, reporting 10 per cent growth in underlying earnings last year thanks to a business plan focused on attracting diners and moving its pubs upmarket. This momentum underpins the central attraction of the shares – a useful dividend yield and a rising dividend.

IC TIP: Buy at 560p
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • High yield, growing dividend
  • Credible growth plans
  • Boost from 'London-centric' events
Bear points
  • Consumer weakness
  • Languid tenanted division

Greene King’s results for 2011-12 highlighted the attractions of management's focus on the managed estate – pubs, restaurants and hotels where the group has full operational control. The division now has 954 sites, with a target of growing to 1,100, and it generates 63 per cent of the group’s profits following a 13 per cent rise in operating profits last year to £150m. Meanwhile – unhappily – the tenanted division is showing some meagre like-for-like improvements. Marginal tenanted pubs are being sold with the proceeds recycled into managed pubs. The brewing side is keeping profits steady on the back of modest revenue rises, and it has recently boosted its marketing spend.

Greene King (GNK)
ORD PRICE:560pMARKET VALUE:£1.22bn
TOUCH:559-560p12-MONTH HIGH:560pLOW: 402p
DIVIDEND YIELD:4.5%PE RATIO:10
NET ASSET VALUE:435pNET DEBT:158%

Year to 29 AprTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20090.955423.721.0
20100.9810237.821.5
20111.0414049.723.1
20121.1411747.624.8
2013*1.1912554.025.3
% change+2+36+24+2

Normal market size: 5,000

Matched bargain trading

Beta: 0.7

*Peel Hunt forecasts (profits & earnings not comparable with historic figures)

In common with most pubs operators, the managed estate has focused on selling more meals. In the year just gone, total food sales were up 17 per cent and now account for 39 per cent of revenue. According to a consultancy, Allegra, the dining-out market should grow on average by 3.4 per cent a year for the next few years. This is good news for Greene King as its strong, value-for-money, food-focused brands, which include Hungry Horse and Cloverleaf, are winning market share. Returns on investment have been impressive, but perhaps more exciting are management's plans to move Greene King’s pubs upmarket. One of the eye-catching figures that the group's bosses claimed for 2011-12 was a near 28 per cent cash-profits return on £27m invested in smartening up pubs.

Two recent acquisitions are helping to inform Greene King about what will work best at the high end of the market; these were the Realpub Company (£53m in April 2011) and Capital Pub Company (£96m in September). Some City analysts thought that Greene King had overpaid for these two, though most analysts did not dispute the quality and desirability of the two London-focused estates of unbranded pubs – especially as they could guide Greene King's bosses about how best to “premiumise” other parts of the estate.

The location of the acquired estates also has the benefit of making Greene King better placed to benefit from this year’s London-centric events – the Diamond Jubilee and the Olympics. True, the consumer backdrop remains weak. However, Greene King’s focus on providing “everyday treats” has credibility - and distinct echoes of the “affordable luxury” boasted by Whitbread’s Costa Coffee chain. Meanwhile, a fall in the inflation rate and the oil price, both of which tend to boost consumer spending, are reasons to temper the caution.