Questor: the market fears the worst for pubs – so buy shares in well-run Greene King

Investors have sold the shares and driven the price to earnings ratio down into single figures because of a series of problems facing the pubs and restaurant sector.

These include higher costs as a result of the Brexit-induced devaluation of sterling, which affects imported wines, for example, as well as rising business rates and higher payroll costs caused by the introduction of the national living wage.

The market also fears that rising inflation, which has reached 1.8pc according to figures released yesterday, will force consumers to rein in their spending on treats such as eating out.

But, says Chris Hutchinson, who recently bought Greene King for the Unicorn Outstanding British Companies fund, all these negative factors are already reflected in the shares’ low valuation, while the stock’s fundamentals are more positive.

“This well-run company has endured difficult times in its 218-year history,” he told Questor. “It has an excellent record of growing its dividend over the past 60 years, with long-term dividend growth of about 5pc annually.

“It is conservatively run – the managers tend to downplay prospects and refuse to exaggerate the value of the firm’s assets, which include many pubs held freehold or on long leases.”

He said debts of about £2bn were manageable, while the dividend was covered twice by profits. Cash generation was also excellent, with a free cashflow yield of 6.7pc and a return on capital of 10pc well above the firm’s cost of capital of about 6pc.

Mr Hutchinson, who has a personal stake in the fund and has outperformed his peers by a very wide margin over the past 10 years, according to FE Trustnet, the investment analyst, acknowledged that the company was unlikely to grow quickly, although it is efficiently integrating its recent acquisition, Spirit, and delivering £35m of cost savings as a result.

But he added: “Even if the shares go nowhere over the next year I’m going to get a near 5pc yield. If the share price remains weak I would be inclined to buy more.”

Describing Greene King as “impossible to replicate”, he said he expected to own it “for the next five years, maybe 10”. “We see it as a core holding in our 32‑stock fund.”

Questor says: buy

Ticker: GNK

Update: RWS

In December we tipped RWS, describing the patent translation firm as unique. Our tip, at 301p, has already produced returns of 17.2pc and yesterday the company announced its latest acquisition, the $82.5m (£66.2m) purchase of Luz, an American rival.

We based our tip on RWS’s inclusion in the strongly performing SDL UK Buffettology fund, run by Keith Ashworth-Lord. He told Questor yesterday: “Luz looks like an excellent fit with CTi, which RWS acquired in 2015.  Though I always worry about large acquisitions, RWS very successfully integrated CTi and this is a shrewd management that is not prone to making errors.  

“I’m pretty happy with [yesterday’s] developments and can see no reason to disturb our shareholding in the company.”

Questor says: hold, buy on weakness

Ticker: RWS

Update: Hargreaves Lansdown

We also recently tipped Hargreaves Lansdown, the giant stockbroker.

Our position remains positive – and our tip at £13.21 has produced gains of 4.9pc – but it’s worth flagging a note sent to shareholders admitting that the firm broke legal procedures around dividends paid out since it floated in 2008.

Recipients of these dividends, totalling £37m, are theoretically at risk of claims against them from Hargreaves itself. This is a procedural glitch and not a cause for concern.The firm has said it has no intention to make such claims and proposes a resolution to protect shareholders, which is to be voted on at a general meeting next month.

Questor says: buy; approve dividend resolution

Ticker: HL.