Raising earnings expectations

Greggs plc 28 November 2018 Update
Download PDF

Greggs

Raising earnings expectations

Trading update

Retail

 

28 November 2018

Price

1,373.00p

Market cap

£1,389m

Net cash (£m) at H118

43.5

Shares in issue

101.2m

Free float

100%

Code

GRG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

20.9

33.0

1.9

Rel (local)

19.5

44.3

7.5

52-week high/low

1399.0p

942.0p

Business description

With over 1,900 shops, eight manufacturing and distribution centres and 22,000 employees, Greggs is the UK’s leading ‘food-on-the-go’ retailer. It utilises vertical integration to offer differentiated products at competitive prices

Next event

FY18 preliminary results

7 March 2019

Analysts

Paul Hickman

+44 (0)20 3681 2501

Kate Heseltine

+44 (0)20 3077 5700

Greggs is a research client of Edison Investment Research Limited

An unscheduled trading upgrade confirms impressive stronger than anticipated sales growth in October and November, on the back of a robust Q3 and tough prior year comparatives. Cautiously factoring in slightly weaker Christmas trading as shoppers increasingly favour buying online, we raise our FY18e PBT by 6.4%. Our valuation increases to 1,516p.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

12/16

894.2

80.3

62.0

31.0

22.1

2.3

12/17

960.0

81.8

64.5

32.3

21.3

2.4

12/18e

1,020.0

86.5

68.1

33.6

20.2

2.4

12/19e

1,097.4

92.4

72.6

36.3

18.9

2.6

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

Robust sales growth in October and November

Bucking the wider trend, Greggs has upgraded expectations for FY18 underlying pre-tax profit to be ‘at least £86m’ (Edison: £81.3m), following a stronger than anticipated eight weeks to 24 November. Over the period, leading on from a solid third quarter, total sales increased by 9.0% (Q318: 7.3%) and like-for-like sales in company-managed shops increased by 4.5% (Q318: 3.2%). Over the year to date, total and like-for-like sales have increased by 6.6% and 2.5%, respectively, against tough prior year comparatives, while operating costs have been well controlled.

Strategic plans continuing apace

The company is continuing to introducing innovative new product ranges and expand the brand into new dayparts, including breakfast. New store openings are targeting work- and leisure-related footfall as opposed to dwindling high-street trade, while the supply chain overhaul is creating solid foundations for growth.

Upgrading earnings forecasts

We upgrade our FY18e PBT by 6.4%. This cautiously assumes a slightly weaker Christmas trading performance compared with the prior year, due to the ongoing shift to online shopping affecting footfall. Our like-for-like sales growth assumptions are 3.3% in H218 and 2.4% across FY18. The company remains on track to open c 100 net new stores this year. In FY19e we raise our like-for-like sales assumption by 50bp to 2%, and our PBT forecast by 10.8%.

Valuation: Undemanding given earnings quality

Based on revised forecasts, our blended valuation increases to 1,516p, representing a 10% premium to the current share price. This implies a FY19e P/E multiple of 20.9x, which does not appear stretched given the quality of earnings and dividend yield prospects.

Exhibit 1: Financial summary

£m

2016

2017

2018e

2019e

2020e

Dec

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

Revenue

 

 

894.2

960.0

1,020.0

1,097.4

1,168.0

Cost of Sales

(324.3)

(348.1)

(374.0)

(399.9)

(423.3)

Gross Profit

569.9

611.9

645.9

697.5

744.7

EBITDA

 

 

125.9

135.7

141.9

154.6

167.0

Operating Profit (before amort. and except.)

80.3

82.2

86.6

92.2

100.6

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

Exceptionals

(5.2)

(9.9)

(6.0)

(4.0)

(3.0)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

75.2

72.3

80.7

88.2

97.6

Net Interest

(0.0)

(0.4)

(0.1)

0.2

0.2

Profit Before Tax (norm)

 

 

80.3

81.8

86.5

92.4

100.8

Profit Before Tax (FRS 3)

 

 

75.1

71.9

80.5

88.4

97.8

Tax

(18.1)

(16.9)

(17.9)

(19.4)

(20.4)

Profit After Tax (norm)

62.3

64.9

68.6

73.0

80.4

Profit After Tax (FRS 3)

58.0

56.9

63.7

69.8

78.0

Average Number of Shares Outstanding (m)

100.4

100.6

100.7

100.4

100.4

EPS - normalised (p)

 

 

62.0

64.5

68.1

72.6

80.0

EPS - (IFRS) (p)

 

 

57.7

56.5

63.3

69.5

77.7

Dividend per share (p)

31.0

32.3

33.6

36.3

40.0

Gross Margin (%)

63.7

63.7

63.3

63.6

63.8

EBITDA Margin (%)

14.1

14.1

13.9

14.1

14.3

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

9.0

8.6

8.5

8.4

8.6

 

BALANCE SHEET

 

Fixed Assets

 

 

323.4

334.7

376.0

408.5

427.1

Intangible Assets

14.3

14.7

18.3

20.7

20.7

Tangible Assets

307.4

319.2

354.2

384.3

402.8

Investments

1.8

0.8

3.6

3.6

3.6

Current Assets

 

 

92.6

106.6

102.1

113.2

135.2

Stocks

15.9

18.7

19.8

21.2

23.6

Debtors

30.7

33.4

35.6

38.1

40.5

Cash

46.0

54.5

46.8

53.9

71.1

Other

0.0

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(121.4)

(127.9)

(136.5)

(144.0)

(140.6)

Creditors

(121.4)

(127.9)

(136.5)

(144.0)

(140.6)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(29.9)

(14.0)

(8.1)

(7.0)

(6.6)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(29.9)

(14.0)

(8.1)

(7.0)

(6.6)

Net Assets

 

 

264.7

299.4

333.6

370.7

415.2

CASH FLOW

Operating Cash Flow

 

 

133.8

134.5

140.0

155.7

157.9

Net Interest

0.1

0.2

(0.1)

0.2

0.2

Tax

(16.2)

(17.6)

(19.3)

(18.6)

(19.8)

Capex

(80.1)

(72.6)

(90.0)

(95.0)

(85.0)

Acquisitions/disposals

4.7

2.2

(4.1)

(1.0)

0.0

Financing

(8.3)

(6.0)

(1.2)

0.0

(0.0)

Dividends

(30.9)

(32.2)

(33.1)

(34.2)

(36.1)

Net Cash Flow

3.0

8.5

(7.7)

7.2

17.2

Opening net debt/(cash)

 

 

(42.9)

(46.0)

(54.5)

(46.8)

(53.9)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(46.0)

(54.5)

(46.8)

(53.9)

(71.1)

Source: Greggs, Edison Investment Research

 

General disclaimer and copyright

This report has been commissioned by Greggs and prepared and issued by Edison, in consideration of a fee payable by Greggs. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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 4, 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Greggs and prepared and issued by Edison, in consideration of a fee payable by Greggs. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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 4, 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues