Greggs — Update 11 May 2016

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 — Update 11 May 2016

Greggs

Analyst avatar placeholder

Written by

David Stoddart

Consumer

Greggs

On target

Trading update

Retail

11 May 2016

Price

1,089.00p

Market cap

£1,102m

Net cash (£m) at December 2015

42.9

Shares in issue

101.2m

Free float

100%

Code

GRG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.5

10.8

(6.0)

Rel (local)

1.2

2.2

6.1

52-week high/low

1,355.00p

969.00p

Business description

With 1,720 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

Interim results

2 August 2016

Analysts

David Stoddart

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Greggs is a research client of Edison Investment Research Limited

Greggs reports that, after 18 weeks’ trading, it remains on target to meet full-year expectations. The range of business initiatives is on track and we are leaving our PBT estimates unchanged. Our valuation of 1,169p a share represents a slight increase from our previous valuation of 1,158p.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

806.1

58.3

44.0

22.0

24.8

2.0

12/15

835.7

73.0

57.3

28.6

19.0

2.6

12/16e

881.8

77.1

60.4

29.9

18.0

2.7

12/17e

941.5

84.8

66.5

33.0

16.4

3.0

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

Solid start to the year

Greggs has reported l-f-l sales growth in company-owned shops of 3.7% in the first 18 weeks of the year. Total sales growth for the period was 5.7%. While these growth rates are slower than those recorded in the first eight weeks of the year, they remain ahead of our modelled full-year sales growth and leave management expecting “to make progress in line with our previous expectations”.

Estimates unchanged

Sales growth continues to run ahead of the pace that we have assumed in modelling FY16. Greggs advises that input cost inflation remains low, providing an offset to the pressure that the National Living Wage is applying to the entire retail industry. Formal consultations on the closure of three bakeries as part of the supply chain transformation programme have completed and that important project remains on track. Overall, Greggs remains slightly ahead of our FY16 assumptions, but not by enough to justify a change in estimates at this early stage.

Valuation: Slight increase

By reference to the average CY16 multiple for the FTSE 250 of c 10x, we propose a valuation of 1,169p a share, a modest increase from our previous valuation of 1,158p. Our initial valuation of Greggs was based on a DCF methodology, which we believe makes the valuation very sensitive to small changes in gilt yields. These may be artificially low at the moment and in future could also experience volatility from extraneous factors such as Brexit.

Q1 trading update

Greggs’ trading update for the 18 weeks to 7 May was highly encouraging: l-f-l sales growth, store refits and net new store openings are all either in line with, or ahead of the run rates assumed in our FY16 estimate.

Total sales for the 18 weeks grew by 5.7% and l-f-l sales in company-managed shops grew by 3.7% over the same period. This marked a slowdown from the 6.8% ‘total’ and 4.2% ‘l-f-l’ Greggs reported for the first eight weeks of the period. The bulk of the slowdown occurred in March, during which footfall was weak across the retail industry: the British Retail Consortium reported a 3.9% year-on-year high street footfall decline in March in an overall retail industry footfall decline of 2.7%. During April l-f-l sales accelerated again to the ‘high 3%s’.

Part of the l-f-l sales gain originates from the store refit programme. Greggs aims to refit 200 stores this year. It completed 55 refits in the first 18 weeks. As new stores mature over their early years, they too add to l-f-l sales growth. Last year’s openings benefited the most recent l-f-l picture and this year’s new units will benefit next year’s. Greggs opened 43 stores in the first 18 weeks, including 23 franchised units with existing franchise partners, and closed 21 giving a net gain of 22. The net addition is encouraging given Greggs’ sensible tendency to focus closures in Q1 after reaping the benefit of Christmas trading. The estate totalled 1,720 stores at 7 May, including 128 franchised units. That included the chain’s first company-owned shop in Northern Ireland, which opened in March.

Both food ingredient and packaging cost inflation remain low, which is allowing Greggs to offset the impact of a 5% wage award to shop staff that became effective in April.

Supply chain investment plans on track

In our initiation note we highlighted Greggs’ plans to invest £100m over five years to upgrade its supply chain. Those plans aim to create additional national manufacturing centres of excellence and increase capacity to serve more than 2,000 outlets. The formal collective consultation on the proposals to close three bakeries as part of the programme has now ended. The smallest site at Sleaford has already closed. Greggs expects to close its Twickenham bakery in Q416 followed by Edinburgh in Q217. The activities of those two sites will transfer to Enfield and Glasgow respectively.

Improvement through change programme on track

The ‘improvement through change’ programme is a five-year, £25m investment in systems targeting annual net benefits of £6m per year. Greggs has delivered, on schedule, the planned migration of its finance systems onto the SAP platform during the first 18 weeks of FY16. The initial signs are that this change was successful. That will allow Greggs to move onto the next phase, shop ordering, which it will trial during the autumn and, if the trials go well, roll out in FY17.

Estimates unchanged

Given management’s statement that it expects “to make progress in line with our previous expectations”, we are leaving our PBT estimates unchanged. The variance in performance versus our assumptions is not so great as to warrant a change at this early point in the year. We model FY16 sales growth of 5.5%, incorporating like-for-like growth of 2.7% and a 2.8pp contribution from the return to opening net new stores. Our assumed like-for-like sales growth is below the +3.7% achieved in the first 18 weeks of FY16, which creates a margin of safety. Given guidance that input cost inflation remains low, we continue to expect an increase in H1 gross margin to lead to a gain of 10bp in the full-year gross margin. Greggs has implemented its 5% pay increase for shop staff and 4% increase for store managers, which will add an incremental £3m to distribution and selling costs. The continuing investment in the various elements of the strategic plan will see depreciation and amortisation continue to increase. Nevertheless, the gross margin gain and operating leverage should allow the operating margin to hold at 8.7%. Underlying EBIT increases from £73.1m to £77.0m. This is before £7m of exceptional charges relating to the closure of facilities as part of the supply chain investment programme, most or all of which we expect to fall in FY16. Greggs has guided that the FY16 tax rate will be c 22%, with the rate in subsequent years being c 2pp above the headline rate.

Sensitivities

The data continue to suggest that consumer spending should increase this year. Moreover, Greggs is already ahead of our full year target for sales growth and should therefore be able to weather the odd weak month such as March and still hit targets. The margin picture also appears encouraging. Greggs has visibility on packaging costs for the remainder of FY16 and on food ingredients as far as August. The pay increase has already gone through so the major income and expense lines appear to be secure. Barring an unexpected collapse in consumer spending, estimates should be attainable.

Valuation slightly increased

The FTSE 250 is trading at a CY16 EV/EBITDA multiple of c 10x, which indicates a value for Greggs of 1,169p. That is close to our DCF-derived initiation valuation of 1,158p (see initiation note). The resulting dividend yields would be 2.6% and 2.8%, which are lower than the corresponding FTSE 250 numbers of 2.9% and 3.1%. However, Greggs has a history of returning additional cash to shareholders over and above the ordinary dividend. Our modelling suggests that there will be scope for further such returns in due course.

Our initiation valuation was based on a 6.9% equity cost of capital. However, we are not inclined to over-rely on the DCF approach as it is unclear whether the recent reductions in 10-year gilt yields are sustainable or relevant, and we believe that changes driven by extraneous factors (such as Brexit) could result in inappropriate volatility in such valuations.


Exhibit 1: Financial summary

£m

2013

2014

2015

2016e

2017e

Dec

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

762.4

806.1

835.7

881.8

941.5

Cost of Sales

(305.9)

(304.8)

(305.1)

(320.8)

(342.5)

Gross Profit

456.5

501.3

530.6

561.0

599.0

EBITDA

 

 

74.9

95.6

113.3

122.0

132.3

Operating Profit (before amort. and except.)

41.5

58.1

73.1

77.0

84.7

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

Exceptionals

(8.1)

(8.5)

0.0

(7.0)

0.0

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

33.4

49.6

73.1

70.0

84.7

Net Interest

(0.2)

0.2

(0.1)

0.1

0.1

Profit Before Tax (norm)

 

 

41.3

58.3

73.0

77.1

84.8

Profit Before Tax (FRS 3)

 

 

33.2

49.7

73.0

70.1

84.8

Tax

(10.3)

(14.0)

(15.4)

(16.3)

(17.9)

Profit After Tax (norm)

30.9

44.3

57.6

60.8

66.9

Profit After Tax (FRS 3)

24.2

37.6

57.6

55.3

66.9

Average Number of Shares Outstanding (m)

100.4

100.5

100.6

100.6

100.7

EPS - normalised (p)

 

 

30.8

44.0

57.3

60.4

66.5

EPS - normalised and fully diluted (p)

 

30.5

43.4

55.8

58.9

64.8

EPS - (IFRS) (p)

 

 

24.1

37.4

57.3

54.9

66.5

Dividend per share (p)

19.5

22.0

28.6

29.9

33.0

Gross Margin (%)

59.9

62.2

63.5

63.6

63.6

EBITDA Margin (%)

9.8

11.9

13.6

13.8

14.1

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

5.4

7.2

8.7

8.7

9.0

BALANCE SHEET

Fixed Assets

 

 

268.9

267.4

298.2

323.2

350.6

Intangible Assets

1.0

4.7

10.2

15.3

20.0

Tangible Assets

267.8

262.7

284.2

304.0

326.7

Investments

0.1

0.0

3.8

3.8

3.8

Current Assets

 

 

65.0

101.5

86.0

86.8

104.6

Stocks

15.4

15.3

15.4

15.7

16.8

Debtors

25.0

26.1

27.6

27.7

29.6

Cash

21.6

43.6

42.9

43.4

58.2

Other

3.0

16.5

0.0

0.0

0.0

Current Liabilities

 

 

(80.7)

(102.1)

(106.0)

(103.4)

(108.9)

Creditors

(80.7)

(102.1)

(106.0)

(103.4)

(108.9)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(17.0)

(20.1)

(11.9)

(10.9)

(10.4)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(17.0)

(20.1)

(11.9)

(10.9)

(10.4)

Net Assets

 

 

236.2

246.7

266.3

295.7

335.9

CASH FLOW

Operating Cash Flow

 

 

82.5

108.6

119.6

115.0

138.3

Net Interest

(0.0)

0.2

0.2

0.1

0.1

Tax

(13.2)

(11.5)

(15.9)

(14.8)

(17.9)

Capex

(48.6)

(48.3)

(71.8)

(85.0)

(75.0)

Acquisitions/disposals

0.2

(4.8)

18.1

15.0

0.0

Financing

0.9

(2.6)

(7.2)

0.0

0.0

Dividends

(19.6)

(19.6)

(43.7)

(29.8)

(30.7)

Net Cash Flow

2.2

22.0

(0.7)

0.5

14.8

Opening net debt/(cash)

 

 

(19.4)

(21.6)

(43.6)

(42.9)

(43.4)

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)

 

 

(21.6)

(43.6)

(42.9)

(43.4)

(58.2)

Source: Greggs, Edison Investment Research. Note: Normalised profit is before exceptional items, but includes share-based payments.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2016. “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

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

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

More on Greggs

View All

Consumer

Greggs — Showing us how it’s done

Consumer

Greggs — A strong finish to FY23

Latest from the Consumer sector

View All Consumer content

Consumer

Domino’s Pizza — Growing the base

Consumer

Topps Tiles — Market tough through H124

Consumer

Greggs — Showing us how it’s done

Hero Image

Consumer

Gym Group — The power of marginal gains

Research: Healthcare

Mesoblast — Update 11 May 2016

Mesoblast

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free