Berenberg slays Greene King's directors for 'destroying shareholder value'

Shares in Greene King were sent lower on Tuesday as Berenberg reiterated its view that the pub company was an investment "value trap", with underlying trading remaining poor and profit "likely to go backwards again" in 2018.

Analysts at the German bank, repeating their 'sell' recommendation on the shares and 430p target price, said management’s debt refinancing "appears to be destroying shareholder value in order to flatter the P&L".

However, the analysts told clients they thought this is being "disingenuous with shareholders" as "in reality" the refinancing of £279m of Spirit debt last year cost an “exceptional” cash amount of nearly £50m.

As management refused to reveal the interest rate on its new £350m revolving credit facility used to fund the refinancing, it has been assumed at less than 2.5% in order to have created any value. "Given even the company’s cheapest secured debt costs circa 4%, we consider it more likely that it has destroyed circa £25m-30m of value," the analysts said.

In the Berenberg view, maintaining the dividend at current levels "is not in the best medium-term interests of the business", with the refinancing of the Spirit debt making the dividend cover "look more favourable" and to remove debt securitisation on more pubs, allowing them to be sold.

"We think both of those are indicative of the challenging financial position Greene King is in now," the analysts said, pointing to poor underlying trading and leverage at 4.2 times, making it hard to see sense in the business continuing to pay £103m of dividends a year when it will only generate free cash flow of £50-60m.

The first eight weeks of the year "may be as good as it gets" for the pubco, the analysts said, amid scorching weather and the boost from the royal wedding and the World Cup - "even in one of the best periods for the pub trade in recent history, Greene King did not achieve adequate LFL growth to offset cost increases and grow earnings".