Positive outlook

Greggs plc 16 January 2018 Outlook
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Greggs

Positive outlook

Q4 trading statement

Retail

 

16 January 2018

Price

1,305p

Market cap

£1,321m

Net cash (£m) at end June 2017

19.9

Shares in issue

101.2m

Free float

100%

Code

GRG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.3)

1.2

33.5

Rel (local)

(6.9)

(1.8)

24.3

52-week high/low

1399.0p

964.5p

Business description

With over 1,800 shops, nine regional bakeries and 19,500 employees, Greggs is the UK’s leading ‘bakery food-on-the-go’ retailer. It utilises vertical integration to offer differentiated products at competitive prices

Next events

Full year results

27 February 2018

Analysts

Tom Gadsby

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Greggs is a research client of Edison Investment Research Limited

Greggs’ Q4 sales update demonstrates a robust performance in what has been a tough retail market. The company’s self-help strategy shows that this is a business firmly in control of its own destiny. Management expects that the industry-wide cost pressures seen in 2017 will continue in 2018 although at lower levels. Greggs expects to deliver full year results in line with management expectations. A combination of strong trading momentum, easing margin pressures and continued self-help gives us confidence in our 2018 forecasts, which we leave unchanged.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

12/15

835.7

73.0

57.3

28.6

22.8

2.2

12/16

894.2

80.3

62.0

31.0

21.0

2.4

12/17e

959.4

80.8

63.6

32.8

20.5

2.5

12/18e

1,028.4

83.9

66.6

34.8

19.6

2.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Q4 trading: A strong end to the year

Greggs has traded well in Q4 with managed-store LFL sales up 3.0% against a tough prior year comparison base of 6.4%. In the year to December, total sales grew by 7.4% and LFL sales by 3.7%. The company has confirmed that it expects to meet management expectations for full year profits. Greggs’ strong Q4 showing comes despite difficult market conditions; market data showed a decline in high street footfall in December of 3.5% reflecting a trend for increasing online Christmas shopping.

Self-help

Greggs is well placed to maintain control of its own destiny. The company converted 132 stores to its ‘bakery food-on-the-go’ format, a further 7% of the portfolio. The new stock management system is bedding down well with the high stock levels seen earlier in the year from the ramp-up now beginning to ease. Investment continues in the supply chain to grow further capacity and bring in more automation in the company’s plants. We believe that Greggs will be able to deliver significant costs savings beyond our forecast period, which should enhance margins rather than simply being used to maintain the company’s competitive position.

2017 margins pressure to ease in 2018

Greggs is beginning to annualise higher levels of food and packaging costs following the roll-off of currency hedges at the end of 2016. Levels of inflation in these areas will ease through 2018. While labour cost inflation will remain a factor, the company is confident in solid margin growth in 2018.

Valuation: No change

With management anticipating 2017 results in line with its previous expectations we retain our forecasts and our valuation of 1,226p per share.

Q4 trading robust vs a tough comparison
Sales performance improves on a two-year view

We note that Greggs has traded particularly well on a two-year view with solid growth of 3.0% on a tough comparison base of 6.4% in the prior year. This is encouraging, we believe, especially against the backdrop of a retail market that saw a 3.5% decline in footfall in December 2017. We expect this trend to continue as more Christmas shopping moves online, but we believe that Greggs is well placed to protect its market position through ongoing initiatives.

Exhibit 1: Two-year LFL sales progression

Source: Edison Investment Research, company data

Estate development – improving prospects

The company opened 131 stores in the year and closed 41 for a net gain of 90 vs guidance of 100, although this is in the main a timing issue. Management has upgraded guidance on store numbers for 2018 from an additional 100 to 110-130, in part due to the timing of openings but also because of progress with one of its key partners, Euro Garages. We believe that the company has scope for some 2,500 stores in total and see the growth to maturity of new stores as an important driver of LFL sales growth.

Exhibit 2: Financial summary

£m

2013

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

762.4

806.1

835.7

894.2

959.4

1,028.4

Cost of Sales

(305.9)

(304.8)

(305.1)

(324.3)

(346.3)

(368.1)

Gross Profit

456.5

501.3

530.6

569.9

613.1

660.3

EBITDA

 

 

74.9

95.6

113.3

125.9

133.3

136.8

Operating Profit (before amort. and except.)

41.5

58.1

73.1

80.3

81.1

83.9

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(8.1)

(8.5)

0.0

(5.2)

(9.5)

(6.6)

Other

0.0

0.0

0.0

0.0

0.0

0.0

Operating Profit

33.4

49.6

73.1

75.2

71.6

77.3

Net Interest

(0.2)

0.2

(0.1)

(0.0)

(0.3)

0.0

Profit Before Tax (norm)

 

 

41.3

58.3

73.0

80.3

80.8

83.9

Profit Before Tax (FRS 3)

 

 

33.2

49.7

73.0

75.1

71.3

77.3

Tax

(10.3)

(14.0)

(15.4)

(18.1)

(17.0)

(17.0)

Profit After Tax (norm)

30.9

44.3

57.6

62.3

63.9

66.9

Profit After Tax (FRS 3)

24.2

37.6

57.6

58.0

56.2

61.6

Average Number of Shares Outstanding (m)

100.4

100.5

100.6

100.4

100.4

100.4

EPS - normalised (p)

 

 

30.8

44.0

57.3

62.0

63.6

66.6

EPS - normalised and fully diluted (p)

 

30.5

43.4

55.8

60.8

62.4

65.4

EPS - (IFRS) (p)

 

 

24.1

37.4

57.3

57.7

56.0

61.4

Dividend per share (p)

19.5

22.0

28.6

31.0

32.8

34.8

Gross Margin (%)

59.9

62.2

63.5

63.7

63.9

64.2

EBITDA Margin (%)

9.8

11.9

13.6

14.1

13.9

13.3

Operating Margin (before GW and except.) (%)

5.4

7.2

8.7

9.0

8.5

8.2

BALANCE SHEET

Fixed Assets

 

 

268.9

267.4

298.2

323.4

349.1

366.2

Intangible Assets

1.0

4.7

10.2

14.3

14.6

18.1

Tangible Assets

267.8

262.7

284.2

307.4

332.7

346.3

Investments

0.1

0.0

3.8

1.8

1.8

1.8

Current Assets

 

 

65.0

101.5

86.0

92.6

87.7

105.7

Stocks

15.4

15.3

15.4

15.9

17.0

18.1

Debtors

25.0

26.1

27.6

30.7

30.6

32.8

Cash

21.6

43.6

42.9

46.0

40.1

54.9

Other

3.0

16.5

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(80.7)

(102.1)

(106.0)

(121.4)

(119.9)

(125.2)

Creditors

(80.7)

(102.1)

(106.0)

(121.4)

(119.9)

(125.2)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(17.0)

(20.1)

(11.9)

(29.9)

(29.1)

(28.7)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(17.0)

(20.1)

(11.9)

(29.9)

(29.1)

(28.7)

Net Assets

 

 

236.2

246.7

266.3

264.7

287.8

317.9

CASH FLOW

Operating Cash Flow

 

 

82.5

108.6

119.6

133.8

133.7

134.0

Net Interest

(0.0)

0.2

0.2

0.1

0.0

0.0

Tax

(13.2)

(11.5)

(15.9)

(16.2)

(19.5)

(15.7)

Capex

(48.6)

(48.3)

(71.8)

(80.1)

(83.7)

(70.0)

Acquisitions/disposals

0.2

(4.8)

18.1

4.7

2.4

0.0

Financing

0.9

(2.6)

(7.2)

(8.3)

(6.6)

0.0

Dividends

(19.6)

(19.6)

(43.7)

(30.9)

(32.1)

(33.5)

Net Cash Flow

2.2

22.0

(0.7)

3.0

(5.9)

14.8

Opening net debt/(cash)

 

 

(19.4)

(21.6)

(43.6)

(42.9)

(46.0)

(40.1)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.0)

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(21.6)

(43.6)

(42.9)

(46.0)

(40.1)

(54.9)

Source: Greggs accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Greggs and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Greggs and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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