Questor share tip: Greggs shares hit record high

Greggs
602p+66p
Questor says HOLD

BRITAINS’s biggest high street purveyor of sausage rolls and pasties, Greggs [LON:GRG], has said it expects profits “materially ahead of expectations“ after reporting accelerating sales. The update has led to a round of broker upgrades, sending shares more than 12pc higher yesterday.

The strong performance also comes amid falling wholesale food prices which should mean greater profits for the bargain baker.

The trading update marks an excellent turnaround, after a miserable run of profit warnings and stodgy sales hit the shares last year.

Broker Liberum called the results “quite excellent” and said they would be “materially upgrading our profits expectations for the group”.

Clive Black from broker Shore Capital increased his full-year forecasts by 12pc and now expects pre-tax profits of £52m (earnings per share 39.2p), up from £46.4m, and excluding £1.4m of property profits.

The bakery chain, with roots in the north of England, said growth was accelerating, with like-for-like sales up by 5.4pc in the 11 weeks to September 13, up from the 3.2pc like-for-like sales growth during the first half of the year ended June 28.

Greggs said that new healthy sandwiches, an upgraded blend of coffee and some sweet treats were all behind the growth in sales.

At the same time as sales are accelerating, profitability is improving. Management said the prices for raw ingredients were falling and “excellent” cost control was taking effect. Management expects profit margins to improve in the second half of the year and added that it expects raw material prices to remain lower near term.

Mr Black said that the majority of the harvests in the Northern Hemisphere are now in and have been completed in near perfect dry conditions, which should keep food inflation low.

The improved profitability is a decent management turnaround from the performance last year when Greggs full-year pre-tax profits slumped by 36pc to £33.2m, from £52.4m the previous year.

As part of the turnaround Greggs is sprucing up its stores and said it had completed 153 refits by September 13, with 200 planned by the end of the year.

Underperforming stores are also being removed, with 43 closures so far this year against 32 new shops opened.

Greggs, founded in Newcastle upon Tyne by John Gregg in the early 1930s, is also becoming lower cost through the closure of legacy in-store bakeries in about 80 shops. This is expected to cost about £9m in charges during the current year but will save £2m in costs this year and £6m a year thereafter. Greggs is a stable operator and a high street bellwether with a handy dividend on offer for investors. The dividend has been held during the past three years but analysts are now eyeing an increase in this year’s final dividend payment.

Mr Black has increased the year end net cash forecast to £32m, from £18m previously and thinks this should allow management to increase the final payment.

Questor recommended holding on to Gregg’s shares when we highlighted “Greggs grows again” back in January. The shares have had a fantastic year so far, rising almost 40pc to 602p, from lows around 430p.

Greggs shares are now trading on 15.3 times earnings and offer a prospective dividend yield of 3.7pc.

However, they are trading at record highs following the 10-for-one stock split in 2009. Given the fragile nature of the consumer recovery we are seeing in the UK, Questor is reluctant to buy at these levels. Hold.