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Rate of recovery continues to surprise

Greggs 28 June 2021 Update
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Greggs

Rate of recovery continues to surprise

Q221 trading update

Retail

28 June 2021

Price

2,583p

Market cap

£2,613m

Net debt (£m) at 2 January 2021 (ex IFRS 16 liabilities)

36.8

Shares in issue

101.4m

Free float

100

Code

GRG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.1

19.5

58.2

Rel (local)

1.6

11.8

32.3

52-week high/low

2,618p

1,119p

Business description

With 2,101 shops and eight manufacturing and distribution centres, Greggs is the leading UK ‘food-on-the-go’ retailer. It uses vertical integration to offer differentiated products at competitive prices.

Next events

H121 results

3 August 2021

Q321 results

5 October 2021

Analysts

Russell Pointon

+44 (0)20 3077 5700

Sara Welford

+44 (0)20 3077 5700

Greggs is a research client of Edison Investment Research Limited

Greggs’ Q221 trading has surprised on the upside, with positive two-year like-for-like (lfl) sales growth continuing through the end of the period, having previously reported a return to growth earlier than expected. We upgrade our revenue forecasts for FY21, assuming a positive lfl outturn for the rest of the year, versus negative previously, leading to PBT upgrades for FY21 and FY22 of 18%. The strength of the recovery also leads us to increase our dividend forecast for FY21 by more than 150%. The P/E for FY22 of 22.4x is consistent with Greggs’ average trading multiples before COVID-19, reflecting its medium-term growth outlook and shareholder returns, but below prior peak multiples.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

1,167.9

114.2

89.7

11.9

28.8

0.5

12/20

811.3

(12.9)

(12.1)

0.0

N/A

N/A

12/21e

1,203.9

126.1

100.9

50.4

25.6

2.0

12/22e

1,307.9

140.4

115.1

57.6

22.4

2.3

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

Strong recovery continues at the end of Q221

Since the last update (to 8 May), trading has continued to be better than management anticipated, with lfl sales growth of +1 to +3% versus FY19 levels in company-managed stores. In the prior trading update, management highlighted strong pent-up demand for retail, which helped footfall generally, and reduced competition produced positive lfl sales growth in the most recent four weeks. At that stage, management anticipated those two positive drivers would ease and a return to negative two-year lfl growth was likely, but Greggs’ lfl trading remains positive.

FY21 PBT forecast upgraded by 18%

Our PBT forecast for FY21 and FY22 increases by 18% to reflect the better-than-expected end to H121, and we now assume lfl sales growth for H221 of +1% versus our prior assumption of -2%, and over 50% drop through to operating profit. Our FY21 revenue forecast of £1,204m is 3% higher than FY19’s reported £1,168m and the PBT estimate is 10% higher. Given the strength of the recovery, we feel comfortable in reverting to pre-COVID-19 levels for the dividend pay-out ratio of 50% for FY21 and FY22, increasing our dividend per share forecast for FY21 by more than 150%.

Valuation: In line with non-COVID-affected multiples

The share price has traded in a relatively narrow range since the May 2021 trading update. On our upgraded forecasts, the P/E multiples for FY21 and FY22 are 25.6x and 22.4x, the latter compares with Gregg’s average multiple in FY19 of 21.8x, and prior peak multiples through FY17–19 of 19.9–27.6x. Our assumption of a higher dividend per share for FY21 and FY22 produces a dividend yield for both years of 2% and 2.2% respectively.

Exhibit 1: Financial summary

£m

2018

2019

2020

2021e

2022e

Year-end December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,029.3

1,167.9

811.3

1,203.9

1,307.9

Cost of Sales

(373.5)

(412.2)

(299.6)

(428.6)

(460.5)

Gross Profit

655.9

755.7

511.7

775.2

847.3

EBITDA

 

 

145.7

231.9

115.4

246.9

263.0

Operating Profit (before amort. and except.)

 

 

89.8

120.7

(6.2)

132.6

146.9

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

Exceptionals

(7.2)

(5.9)

(0.8)

0.0

0.0

Operating Profit

82.6

114.8

(7.0)

132.6

146.9

Net Interest

(0.0)

(6.5)

(6.7)

(6.5)

(6.5)

Profit Before Tax (norm)

 

 

89.8

114.2

(12.9)

126.1

140.4

Profit Before Tax (FRS 3)

 

 

82.6

108.3

(13.7)

126.1

140.4

Tax

(18.2)

(22.4)

0.7

(24.0)

(23.9)

Profit After Tax (norm)

71.6

91.8

(12.2)

102.1

116.6

Profit After Tax (FRS 3)

65.7

87.0

(13.0)

102.1

116.6

Average Number of Shares Outstanding (m)

100.7

100.8

101.0

101.2

101.2

EPS - normalised fully diluted (p)

 

 

70.3

89.7

(12.1)

100.9

115.1

EPS - (IFRS) (p)

 

 

65.3

86.3

(12.9)

100.9

115.1

Dividend per share (p)

35.7

11.9

0.0

50.4

57.6

Gross Margin (%)

63.7

64.7

63.1

64.4

64.8

EBITDA Margin (%)

14.2

19.9

14.2

20.5

20.1

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

8.7

10.3

(0.8)

11.0

11.2

BALANCE SHEET

Fixed Assets

 

 

347.5

646.5

631.0

641.6

670.4

Intangible Assets

16.9

16.8

15.6

14.9

14.3

Tangible Assets

330.5

353.7

345.3

356.6

386.0

Right-of-Use Assets

0.0

272.7

270.1

270.1

270.1

Other

0.2

3.3

0.0

0.0

0.0

Current Assets

 

 

140.6

142.3

98.7

193.7

241.8

Stocks

20.8

23.9

22.5

25.2

27.1

Debtors

31.6

27.1

39.4

33.0

35.8

Cash

88.2

91.3

36.8

135.5

178.9

Other

0.0

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(145.1)

(208.7)

(144.1)

(193.9)

(204.4)

Creditors

(136.4)

(154.1)

(91.1)

(140.9)

(151.4)

Leases

0.0

(48.8)

(48.6)

(48.6)

(48.6)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Other

(8.7)

(5.8)

(4.4)

(4.4)

(4.4)

Long Term Liabilities

 

 

(13.8)

(233.3)

(264.0)

(261.7)

(261.7)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Leases

0.0

(226.9)

(243.1)

(243.1)

(243.1)

Other long term liabilities

(13.8)

(6.4)

(20.9)

(18.6)

(18.6)

Net Assets

 

 

329.2

346.8

321.6

379.7

446.0

CASH FLOW

Operating Cash Flow

 

 

152.2

246.0

61.6

301.3

272.8

Net Interest

0.2

(6.3)

(5.9)

(6.3)

(6.1)

Tax

(16.1)

(20.3)

(10.7)

(24.0)

(23.9)

Capex

(64.9)

(87.7)

(59.8)

(73.0)

(93.0)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

Equity financing

5.3

4.9

3.7

3.7

3.7

Dividends

(33.1)

(72.1)

0.0

(51.1)

(58.3)

Borrowings

0.0

0.0

0.0

0.0

0.0

Other

(9.9)

(61.4)

(43.4)

(51.9)

(51.9)

Net Cash Flow

33.7

3.1

(54.5)

98.7

43.3

Opening cash

 

 

(54.5)

(20.8)

(17.7)

(72.2)

26.5

Other

0.0

0.0

0.0

0.0

0.0

Closing cash

 

 

(20.8)

(17.7)

(72.2)

26.5

69.8

Closing net debt/(cash)

 

 

(88.2)

(91.3)

(36.8)

(135.5)

(178.9)

Closing net debt/(cash) including leases

 

 

(88.2)

184.4

254.9

156.2

112.8

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 research department of Edison 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 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison 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.

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.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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 research department of Edison 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 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison 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.

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.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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