Greene King — Update 8 December 2015

Greene King — Update 8 December 2015

Greene King

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Greene King

Growth baked in

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9 December 2015

Price

943p

Market cap

£2,913m

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Share details

Code

GNK

Listing

LSE

Shares in issue

308.9m

Business description

Greene King is a leading UK pubco and brewer. It operates 3,069 outlets, and its main trading businesses are Retail, Pub Partners and Brewing & Brands. Retail brands include Hungry Horse, Old English Inns, Farmhouse Inns, Metropolitan, Chef & Brewer, Flaming Grill and Loch Fyne Seafood & Grill.

Bull

Visibility on 70% of next two years’ earnings growth.

Offers meaningful growth and income, with an 8.7% compound annual dividend growth since 1980.

Improving ROCE, up from 8.5% in H112 to 9.4% in H116, with management incentivised on ROCE performance.

Bear

Exposed to discretionary spend and consumer confidence.

Acquisition risk (though not likely to be active near term).

Net debt/EBITDA looks high at 4.2x despite freehold backing.

Analysts

Paul Hickman

+44 (0)20 3681 2501

Richard Finch

+44 (0)79 0057 0522

Greene King has developed a reputation as a leading pub company combining a consistent record of successful earnings growth and a meaningful dividend yield. Now 80% larger by market cap than its nearest peer, it continues to lead the consolidation of the sector. Its latest acquisition, of Spirit Group, is integrating well, which significantly underpins earnings and dividend growth over the next two years.

Spirit integration ahead, synergies raised

The interims signal that the integration of Spirit, acquired in June, is ahead of plan, and synergies have been raised from £30m to £35m worth c 15% of annual earnings. Spirit adds 1,207 pubs, boosting the estate by c 60% to 3,069. The synergies mean growth worth c 9p per share is baked in over the next two years, giving good visibility on around 70% of consensus EPS growth to April 2017.

Strong interims

Interims were strong. EPS were up 15% to 34.5p and the dividend was raised 6.3% to 8.45p. PBT grew 46.9% to £121.3m, although this was mainly on Spirit – existing businesses grew 6%. Retail like-for-like sales growth of 2.0% compares well with muted national trends, although operating margin shaded 20bp on investment in service, and operating profit rose 49.8% to £137.4m. The Pub Partners tenanted and franchised business grew like-for-like net income 2.4%, and operating profit 0.4%. Brewing & Brands increased operating profit by 5.1% on own-brewed volume up 3.6%. Net debt of £2,079m was up £710m on the acquisition, although at 4.2x EBITDA it is reasonable given that 83% of the estate is freehold.

Record of success on acquisitions

Greene King is some 80% larger by market cap than its next pubco peer, Mitchells & Butlers. It has steadily grown its market cap by some 150% over the last five years. Growth has been part-driven by acquisitions, including in the past Morland, Old English Inns, Laurel, Belhaven, Hardys & Hansons, Loch Fyne, New Century Inns, and Capital Pub Co. Spirit, acquired for £763m plus the assumption of £837m net debt, is therefore the latest in a long line of successfully integrated assets.

Valuation: Fair, given strong prospects

The shares recognise the enhanced growth as well as market opportunities that Spirit brings, on an FY16e consensus P/E of 14.1x. But with double-digit earnings growth and allowing for a yield of 3.3%, that is not much more than a PEG of 1x.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/14

1,301.6

173.1

61.1

28.4

15.4

3.0

04/15

1,315.3

168.5

60.6

29.8

15.6

3.2

04/16e

2,081.0

246.9

67.0

31.5

14.1

3.3

04/17e

2,276.0

285.9

74.5

34.0

12.7

3.6

Source: Company reports, Bloomberg (post-results consensus)

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Surface Transforms — Update 8 December 2015

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