Greene King - Geared to an economic recovery

A recent trading update for Greene King (LSE, GNK) has shown like-for-like sales growth despite the wettest UK summer on record.  Greene King’s strategy has been to grow its fully owned pubs estate and increase food sales. 

The summer of 2012 was billed as one of grand events for the UK with the Olympics, the Diamond Jubilee and the Euro 2012 football championships. The extra bank holiday for the Jubilee even had economists worried that Q2 GDP would suffer.

It comes as little surprise that Greene King has reported positive like-for-like sales growth.

The investment case for Greene King is that the company remains modestly rated despite solid trading and decreasing balance sheet risk. Strengthening UK consumer confidence underpins prospects and both groups are also boosting food sales and growing their fully owned pubs estate.

The key performance indicator for Greene King is like-for-like (LFL) sales as it shows how well the pubs have grown revenue from one period to the next.  It only includes pubs that existed in both periods under review rather than recent acquisitions.

In the 18 weeks to 2nd September (starting 30th April) Greene King reported that its retail division, fully owned pubs, saw like-for-like sales of 5.1%. Food sales saw 5.2% LFL growth while drink sales were up 5% and room sales rose 4.9%.

The robust performance was despite a “minimal net impact” from the Olympics as busy pubs in the suburbs were offset by quiet pubs in central London.  To put the 5.1% LFL growth in context in the prior financial year the retail business saw 4% LFL growth.

Looking at the brewing businesses and Greene King saw a 0.7% fall in core ale brands in the year to 29th April and in the 18 weeks to 2nd September volumes fell 0.9%. Greene King, saw its “pub partners” business EBITDA per pub up 3.5% in the 18 weeks to 2nd September.

Greene King is valued at 10.7X for the year ending April 2013 with a dividend yield of 4.3%.  The P/E for the following financial year falls to 10.2X and the dividend yield increases to 4.7%.

High debt levels are a key reason that investors have been cautious towards Greene King but interest coverage is improving as profits recover.  We expect the level of balance sheet risk to decrease over time as the bottom line shows strength.

Greene King has pursued acquisitions as well as building new pubs and also sees foods sales as a key focus for growth. The company saw net debt increase modestly in their last full financial years as they invested in growing the number of fully owned pubs.  This will help generate profits growth going forward and shows that the pub sector still has life in it.

The article is produced by Senior Research Analyst, Andrew Latto