It has not been an easy time for British pubs lately. Costs have been rising across the board, from increases in business rates, the apprenticeship levy and the national living wage to inflationary pressures on food and drink. At the same time, a combination of oversupply following several years of expansion by the eating-out sector and consumer belt tightening has hit sales. Greene King (GNK) has not been able to buck this industry trend. Chief executive Rooney Anand says that never in his career has he seen so much added expense come all at once, with full-year cost increases expected to tot up to £60m. Little wonder then that first-half underlying operating margins slumped from 19.5 per cent to 18.3 per cent while both the share price and earnings forecasts have been on a precipitous downward trajectory (see graph). But if attempts to mitigate tough trading are successful and the downgrade trend peters out – both of which look possible – the value and income now on offer looks very enticing.
Cost savings on track
Focus on the customer experience
Renegotiating some debt
Optimistic forecasts
Eating-out oversupply
Rising costs
Based on Bloomberg consensus data, Greene King shares trade at a multiple to next-12-month earnings that has only been surpassed during the depths of the financial crisis and is in the bottom 11 per cent of the 10-year range. There is 27 per cent upside to the 10-year average forward PE ratio of 10.2 times. Meanwhile, the enterprise value/sales multiple, a key metric for recovery investors, is the lowest it has been in the past decade.
To mitigate its current woes, Greene King is aiming to make savings of £40m-£45m by finding extra synergies from the 2015 acquisition of Spirit, driving down buying prices and conducting a full review of the cost base. At the same time it is aiming to limit sales declines with a £10m investment in promotions, staff and community events. It's early days, but management noted that since the scheme got under way six weeks ago the trend in meals sold has improved by 1.3 percentage points and drink volumes by 2.6 percentage points.
Management also hopes to make the best of a bad situation by optimising its brands, which includes de-branding its Fayre & Square chain. Encouragingly, so far brand optimisation is delivering a return on investment of about 25 per cent. Also, on a brighter note, first-half revenue from brewing, while only accounting for one-tenth of the total, was up 7.9 per cent to £102.3m.
Greene King is also improving its debt profile. It is in the process of renegotiating borrowings relating to the acquisition of Spirit and will pre-pay some of its existing bonds, which will decrease its payments in the future. Granted, net debt increased by £44.4m during the first half, giving a net debt to cash profits ratio of 4.2 times. This may seem high, but is in line with management’s expectations and there is good headroom inside the group's securitisations (debt secured against specific assets). Overall, the debt looks fairly well supported by cash flows and the pub properties, which are mainly freeholds and long leaseholds.
| GREENE KING (GNK) | ||||
| ORD PRICE: | 530p | MARKET VALUE: | £1.64bn | |
| TOUCH: | 530-531p | 12-MONTH HIGH: | 768p | LOW: 490p |
| FW DIVIDEND YIELD: | 6.5% | FW PE RATIO: | 8 | |
| NET ASSET VALUE: | 646p* | NET DEBT: | 106% | |
| Year to 30 Sep | Revenue (£bn) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
| 2015 | 1.32 | 169 | 61.0 | 29.8 |
| 2016 | 2.07 | 256 | 69.6 | 32.1 |
| 2017 | 2.22 | 274 | 70.7 | 33.2 |
| 2018** | 2.17 | 253 | 66.1 | 33.9 |
| 2019** | 2.15 | 246 | 64.4 | 34.5 |
| % change | -1 | -3 | -2 | +2 |
| NMS: | 3,000 | |||
| Matched Bargin Trading | ||||
| BETA: | 0.66 | |||
Normal market size: 3,000, matched bargain tarding, Beta: 0.66 *Includes intangible assets of £1.26bn, or 408p a share | ||||
| **Deutsche Bank forecasts, adjusted PTP and EPS figures | ||||
