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Greggs — Let’s talk about growth…

Greggs (LSE: GRG)

Last close As at 19/04/2024

GBP27.78

▲ 46.00 (1.68%)

Market capitalisation

GBP2,841m

More on this equity

Research: Consumer

Greggs — Let’s talk about growth…

Greggs’ H121 results demonstrate how well management has steered the company through COVID-19, notably the re-instatement of the interim dividend. Management is now firmly focused on delivering on its refreshed long-term growth strategy. We have upgraded our FY21 PBT forecasts by 7% to reflect the resilient trading and cost control. Our forecasts for revenue, PBT and dividends in FY21 are higher than reported in FY19, despite the ongoing disruption to some parts of the estate, highlighting the success of new initiatives that are expected to enhance future growth prospects. On our new forecasts, the P/E multiples for FY21 of 26.8x and FY22 of 24.7x are below recent peak multiples.

Russell Pointon

Written by

Russell Pointon

Director, Consumer

Consumer

Greggs

Let’s talk about growth…

H121 results

Retail

6 August 2021

Price

2,865p

Market cap

£2,917m

Net cash (£m) at 3 July 2021 (ex IFRS 16 liabilities)

118.3

Shares in issue

101.8m

Free float

100

Code

GRG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.5

20.4

119.6

Rel (local)

2.6

18.1

82.5

52-week high/low

2,864p

1,119p

Business description

With 2,115 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

Q321 results and
capital markets day

5 October 2021

FY21 results

February 2022

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’ H121 results demonstrate how well management has steered the company through COVID-19, notably the re-instatement of the interim dividend. Management is now firmly focused on delivering on its refreshed long-term growth strategy. We have upgraded our FY21 PBT forecasts by 7% to reflect the resilient trading and cost control. Our forecasts for revenue, PBT and dividends in FY21 are higher than reported in FY19, despite the ongoing disruption to some parts of the estate, highlighting the success of new initiatives that are expected to enhance future growth prospects. On our new forecasts, the P/E multiples for FY21 of 26.8x and FY22 of 24.7x are below recent 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

31.9

1.6

12/20

811.3

(12.9)

(12.1)

0.0

N/A

0.0

12/21e

1,228.9

135.4

107.0

54.1

26.8

1.9

12/22e

1,309.9

145.1

116.1

58.8

24.7

2.1

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

H121 results: PBT ahead of H119

Greggs’ H1 PBT of £55.5m is c 36% higher than reported in H119. While parts of the physical estate continue to trade below H119 levels, more recent initiatives, such as delivery at 8.5% of company-managed sales, have helped to satisfy demand, which obviously remains strong, leading to stable revenue versus H119. Operating costs benefited from a number of temporary/one-off benefits as well as some permanent structural cost savings. The net cash position has improved significantly to £118.3m (£36.8m end FY20) due to the higher profitability, working capital benefits as growth has resumed, and relatively lower capex in the early stages of recovery. The interim dividend has been reinstated at 15p per share.

Forecasts: FY21 PBT upgraded by 7%

We upgrade our FY21 PBT forecast by 7% to c £135m and FY22 by c 3% to £145.1m. Our forecast for FY21 increases due to the strong H121 performance with respect to revenue and costs, taking it to c 19% above FY19’s adjusted PBT of £114.2m. These feed through to EPS upgrades of 6% for FY21 (to 107p) and 1% for FY22 (to 116.1p), the latter reflecting management’s new guidance for a modestly higher tax rate in FY22 than previously expected. Assuming 2x dividend cover on normalised basic EPS, our FY21 DPS forecast increases by 7% to 54.1p and by 2% to 58.8p in FY22.

Valuation: Below prior peak multiples

Greggs’ P/E multiple for FY21 is 26.8x and for FY22 is 24.7x, which compares with its prior peak multiple of 27.6x in FY19, and fairly typical annual peak multiples of c 22–24x in more recent years prior to FY19. The higher multiples reflect its enhanced growth prospects, which we believe will be further detailed at the time of the Q321 results.

Strong recovery leads to further upgrades

Greggs had already indicated a better-than-expected recovery as COVID-19 restrictions ended in trading updates in May (Recovering better than expected) and June (Rate of recovery continues to surprise), which led to significant upgrades to profit forecasts for the year. On the back of resilient current trading, management has indicated that its expectations for FY21’s profits are again slightly higher than expected.

Given the significant negative effects on consumer-facing stocks during COVID-19, there is more value in comparing Greggs’ H121 results to H119 to highlight the extent of its recovery.

Exhibit 1: Summary income statement

£m

H119

H120

H121

H121 vs H119

H121 vs H120

Revenue

546.3

300.6

546.2

(0%)

82%

Company-managed stores

503.1

262.5

488.3

(3%)

86%

B2B including franchises

43.2

38.1

57.9

34%

52%

Gross profit (before exceptionals)

356.6

178.4

349.9

(2%)

96%

Gross margin

65.3%

59.3%

64.1%

Operating costs

(312.7)

(239.9)

(290.5)

(7%)

21%

Operating costs/ sales %

(57.2%)

(79.8%)

(53.2%)

Operating profit/ (loss) before exceptionals

43.9

(61.5)

59.4

35%

N/A

Margin

8.0%

(20.5)%

10.9%

Exceptionals

(4.0)

(0.7)

0.0

N/A

N/A

PBT before exceptionals

40.7

(64.5)

55.5

36%

N/A

Tax

(8.3)

11.4

(11.1)

Tax rate

20.4%

17.7%

20.0%

Normalised PAT

32.4

(53.1)

44.4

37%

N/A

EPS (FD) (p)

31.7

(52.7)

43.2

36%

N/A

DPS (p)

11.9

0.0

15.0

26%

N/A

Source: Greggs

Revenue: Supported by new initiatives

At c £546m, Greggs’ H121 revenue is broadly comparable with that of H119, however this masks differing trends between company-managed stores that are trading below H119, offset by higher revenue from B2B including franchises, for example motorway services and sales through Iceland.

Through H121, revenue from company-managed stores was 9.2% below H119 levels on a like-for-like basis as c 15% of the estate (ie public transport, city centres and workplaces) has yet to recover to prior levels of revenue, as might be expected. The most significant part of the estate (ie towns and suburbs and other shopping; c 68% of the total) have traded above H119 levels consistently since lockdown restrictions began to ease in April 2021. This is reflected in the two-year like-for-like growth rates for Q121 of -21.5% and Q2 of +2.8%. For company-managed stores revenue, the two-year like-for-like H121 weakness is offset by more locations (1,761 end H121 versus 1,700 end H119), and the new revenue from delivery, which represented c 8.5% of the total in H121. As previously flagged, management believes it has benefited from general pent-up demand and likely market share gains as some competitors may not have survived the pandemic.

Exhibit 2: Like-for-like revenue recovery versus FY19

Source: Greggs H121 results presentation

Costs and margin: Limited cost pressures and one-off benefits

The H121 gross margin of 65.3% reflects relatively limited COGS inflation, offset by some dilution from lower-margin delivery sales that provides some leverage further down the P&L statement given the limited in-store costs to serve.

Total operating costs of c £291m in H121 were lower on an absolute basis (c £22m) compared to H119, and relative to revenue, due to a number of temporary or one-off items, the most significant being business rates relief (£13m) that has ended and lower incentive costs (£4m). It is worth highlighting Greggs has not benefited from the furlough support provided by the government, having previously repaid all monies received from the Coronavirus Job Retention Scheme.

Cash flow and balance sheet

Greggs’ substantial increase in free cash flow generation in H121 versus H119 led to a strong improvement in the net cash position. Excluding IFRS 16 liabilities, the net cash position of £118.3m compares with £36.8m at the end of FY20. In H121 Greggs’ free cash flow of c £102m was significantly higher than H119’s £50.5m. This reflects the higher profitability, more positive working capital inflows with the ‘reflating’ of the business against the COVID-19 affected H120 comparative, and lower relative capex in the early stages of recovery. Working capital inflows are likely to revert to more normal levels in future periods.

Including IFRS 16 liabilities of £290m, the net debt position of £171m compares with the end FY20 position of £255m.

Management has re-affirmed the plan to open 100 net new stores in FY21, (37 opened in H121), but capex for the year is now estimated by the company to be marginally lower than previously expected, at c £65m versus c £70m previously, due to minor phasing changes.

The strong financial position and confidence in the outlook for the business led to the reinstatement of the interim dividend, the first since H119. At 15p per share, the dividend is c 26% above the H119 dividend of 11.9p. Management indicates the full year dividend will revert to the customary 2x cover by earnings. Prior to COVID-19, the typical H1:H2 split for annual dividends was c 30:70. Our forecast year-end net cash position of c £141m, pre IFRS 16 liabilities, suggests substantial flexibility for management to return further cash to shareholders, in the absence of an unforeseen disruption to trading.

Strategy: Expansion and diversification

As Greggs has emerged from the COVID-19 disruption, management is looking forward to delivering on its medium- and long-term growth strategy. The strategy’s key pillars are:

■

Estate growth – the aspiration to grow the estate to 3,000 locations as highlighted above, while improving the size, service and quality of locations.

■

New channels and layouts – including delivery and ‘click and collect’, which will further enable Greggs to extend into new day parts, eg the evening, following its success at breakfast time and customise orders.

■

Greggs Rewards – further development of the recently-launched and well-received app to increase customer engagement and drive sales per customer.

■

Further menu development – following a relative hiatus on new lines during COVID-19, and including more vegan products as well as more healthy eating.

■

Investing in the supply chain and systems – to support the expected growth and new services.

■

The Greggs Pledge – ongoing improvement in its ESG credential and continuing to act responsibly.

Management will elaborate further on these at a capital markets day, which is expected with the Q321 results, on 5 October 2021.

Current trading: Resilient, leading to higher forecasts

In the first four weeks after the period end, the two-year like-for-like growth in company-managed stores has slowed to 0.4%. Management was expecting some softening from the initial post-COVID-19 recovery into H221, as demand and competition normalise. It was stressed that trading through July was as volatile as the British summer weather, ranging from heatwave (not good for traditional bakery but good for lower-margin bought-in cold drinks) to extreme rainfall.

With respect to costs, management points to increasing cost pressure, mainly in food, packaging and energy, following limited cost inflation in H121. At c 33% of costs, food, packaging and energy cost inflation is expected to be c 2.5% in H221 with some protection provided by five months’ forward cover, so inflation here will likely have more of an effect in FY22. Expected inflation for staff costs is lower than has been recently experienced (anticipated 2% in H221 versus 2.6% in H121) due to less pressure from the National Living Wage. Shop occupancy costs (c 8% of the total) will begin to rise following the ending of business rates relief, however management has a very clear message to landlords that it expects better terms from them. Due to the turmoil elsewhere on the high street, Greggs is enjoying leverage in negotiating terms, and its ‘covenant’ means it is seen as an attractive tenant in more locations that previously, for example transport hubs given the strength of the offer.

Following the upgrade to forecasts in May and June 2021, management has indicated a further increase in its profit expectations for FY21.

Forecasts: FY21 PBT upgraded by 7%

We upgrade our PBT forecast for FY21 by 7% to c £135m and for FY22 by 3% to c £145m. FY21 increases due to the strong H121 performance of revenue and costs. These feed through to EPS upgrades of 6% for FY21 (to 107p) and 1% for FY22 (to 116.1p), the latter reflecting management’s new guidance for a higher tax rate in FY22 than previously expected.

Exhibit 3: Forecast changes

£m

FY21 (new)

FY22 (new)

FY21 (old)

FY22 (old)

Change FY21

Change FY22

Revenue

1,228.9

1,309.9

1,203.9

1,307.9

2%

0%

PBT (normalised)

135.4

145.1

126.1

140.4

7%

3%

Tax

(25.7)

(26.1)

(24.0)

(23.9)

7%

9%

Tax rate

19%

18%

19%

17%

EPS (p)

107.0

116.1

100.9

115.1

6%

1%

DPS (p)

54.1

58.8

50.4

57.6

7%

2%

Source: Edison Investment Research

Valuation: Below prior peak multiples

Using our new forecasts, Greggs’ P/E multiple for FY21 is 26.8x and for FY22 is 24.7x. This compares with its prior peak multiple of 27.6x in FY19, and fairly typical annual peak multiples of c 22–24x in more recent years prior to then. The higher multiples reflect the company’s enhanced growth prospects, for example an aspiration to reach 3,000 locations versus the current c 2,100 (with annual net openings prior to COVID of c 90-100), and the opportunity to exploit new delivery channels, day parts and customers.

Exhibit 4: 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

1,228.9

1,309.9

Cost of Sales

(373.5)

(412.2)

(299.6)

(436.5)

(461.5)

Gross Profit

655.9

755.7

511.7

792.4

848.4

EBITDA

 

 

145.7

231.9

115.4

257.2

268.7

Operating Profit (before amort. and except.)

 

 

89.8

120.7

(6.2)

142.9

152.6

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)

142.9

152.6

Net Interest

(0.0)

(6.5)

(6.7)

(7.5)

(7.5)

Profit Before Tax (norm)

 

 

89.8

114.2

(12.9)

135.4

145.1

Profit Before Tax (FRS 3)

 

 

82.6

108.3

(13.7)

135.4

145.1

Tax

(18.2)

(22.4)

0.7

(25.7)

(26.1)

Profit After Tax (norm)

71.6

91.8

(12.2)

109.7

119.0

Profit After Tax (FRS 3)

65.7

87.0

(13.0)

109.7

119.0

Average Number of Shares Outstanding (m)

100.7

100.8

101.0

101.3

101.3

EPS - normalised fully diluted (p)

 

 

70.3

89.7

(12.1)

107.0

116.1

EPS - (IFRS) (p)

 

 

65.3

86.3

(12.9)

108.3

117.5

Dividend per share (p)

35.7

11.9

0.0

54.1

58.8

Gross Margin (%)

63.7

64.7

63.1

64.5

64.8

EBITDA Margin (%)

14.2

19.9

14.2

20.9

20.5

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

8.7

10.3

(0.8)

11.6

11.7

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

200.1

247.1

Stocks

20.8

23.9

22.5

25.7

27.1

Debtors

31.6

27.1

39.4

33.7

35.9

Cash

88.2

91.3

36.8

140.7

184.1

Other

0.0

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(145.1)

(208.7)

(144.1)

(196.5)

(204.7)

Creditors

(136.4)

(154.1)

(91.1)

(143.5)

(151.7)

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

383.4

451.0

CASH FLOW

Operating Cash Flow

 

 

152.2

246.0

61.6

313.1

277.3

Net Interest

0.2

(6.3)

(5.9)

(7.3)

(7.1)

Tax

(16.1)

(20.3)

(10.7)

(25.7)

(26.1)

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

(54.9)

(59.5)

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)

103.9

43.3

Opening cash

 

 

(54.5)

(20.8)

(17.7)

(72.2)

31.7

Other

0.0

0.0

0.0

0.0

0.0

Closing cash

 

 

(20.8)

(17.7)

(72.2)

31.7

75.1

Closing net debt/(cash)

 

 

(88.2)

(91.3)

(36.8)

(140.7)

(184.1)

Closing net debt/(cash) including leases

 

 

(88.2)

184.4

254.9

151.0

107.6

Source: Greggs, Edison Investment Research


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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

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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