Greene King is 'significantly undervalued', say analysts
Friday was a good day for Greene King as its first quarter results impressed analysts sufficiently to lead to upgrades from Peel Hunt and Canaccord.
After the hot summer spell and World Cup football boosted sales in the first 18 weeks of the year, with like-for-like (LFL) sales up 2.8%, Canaccord said Greene King's statement showed it was "starting to get its mojo back", with the "long haul" of integrating its Spirit acquisition now in the past and its focus on growing earnings starting to show.
While the hot summer weather and the World Cup has helped Greene King out so far, Canaccord said it was "too early in the year to raise forecasts", something it had not contemplated doing for several years, but chose to up its recommendation to 'buy' from 'hold' on valuation grounds.
Despite Greene King trading "well below" historic p/e valuation averages, Canaccord felt confident in saying this gap should start to close. "The dividend is safe, in our view."
Peel Hunt said the pubco was "significantly undervalued", with EV/EBITDA valuation below the level seen in the 2008-09 financial crisis/recession. "In comparison, if managed LFL sales can exceed 1.5% in 2019E, the combination of profit and dividend growth, as well as net debt reduction, should return."
With like-for-like sales in its core managed pub division growing solidly, Shore Capital was also satisfied with Greene King's positive update with the robust trading.
ShoreCap said it £243m pre-tax profit expectation for Greene King will require broadly flat LFL sales growth for the remainder of the financial year - a period where the landlord will face easier comparatives over the winter, following last year’s heavy snow.
With Greene King trading on a 2019F PER of 8.4x, an EV/EBITDA of 7.4x and a dividend of 6.3%, ShoreCap also saw these metrics as being "too low" given the firm's asset backing and the additional financial flexibility that will be afforded to it once it completes the refinancing of the Spirit acquisition.