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Greene King in good Spirit

The acquisition of rival Spirit Pub was a key driver of half-year growth for Greene King
December 2, 2015

Greene King (GNK) investors were in good spirits - buoying the pub group's shares 13 per cent in morning trading - after half-year results showed 46 per cent growth in adjusted operating profits. The primary driver was the June acquisition of Spirit Pub Company, but there were also encouraging signs of organic growth. Greene King's directly managed estate posted like-for-like sales growth of 2 per cent in the period, ahead of the industry's 1.5 per cent according to the Coffer Peach Business Tracker.

IC TIP: Buy at 924p

One way management has tried to stimulate organic growth is by focusing on the whole day, rather than just peak evening drinking time. Greene King relaunched or introduced breakfast offers in three of its pub brands, which management said helped to drive a 9.9 per cent increase in food and drink sales before 5pm.

The big task ahead for the combined Greene King and Spirit retail business is rationalising its brands. The aim is to halve the current number to about 10, and reposition 300-400 sites under one of five growth brands, which include Flaming Grill and its premium London brand Metropolitan. The chosen brands will eventually account for about 950 sites, while the 'local pubs' estate will cover a further 800. In the company's separate 'pub partners' division - comprising 1,094 tenanted, leased and franchised sites - the disposal of 15 under-performing pubs boosted average operating profit per pub by 8.7 per cent.

One problem facing the group and its rivals is the forthcoming introduction of the national living wage. Greene King said it would be able to mitigate the impact, including through "enhanced labour scheduling", but still expected the policy to cost it £2m in the 2016-17 financial year over and above general wage inflation.

Analysts at Numis upgraded their forecasts to factor in expected acquisition synergies of £35m, up from the £30m previously guided, and £12m this year, up from £9m. They now expect full-year pre-tax profits of £251m, leading to EPS of 67p, compared to £169m and 61p in FY 2015.

GREENE KING (GNK)
ORD PRICE:924pMARKET VALUE:£2.85bn
TOUCH:923.5p-924p12-MONTH HIGH:927pLOW: 712p
DIVIDEND YIELD:3.3%PE RATIO:25
NET ASSET VALUE:583p*NET DEBT:115%

Half-year to 18 OctTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201461572.029.57.95
201591884.924.98.45
% change+49+18-16+6

Ex-div:17 Dec

Payment:22 Jan

*Includes intangible assets of £1.32bn or 427p a share