UK Edition
Questor: Solid foundations mean it’s too soon to call time on pub firm Greene King
BAR room disagreements can get messy. Spilt drinks, scattered peanuts, angry words: the pub is the natural home for people that like to put the world to rights, but sometimes their thinking is addled by the booze. Greene King has seen plenty of spillages over the years.
The FTSE 250 group has 2,900 pubs, hotels and restaurants in its portfolio under brands including Hungry Horse and Chef & Brewer.
In addition, it has a heritage of brewing great beer brands: Greene King IPA, Old Speckled Hen, Abbot Ale and Belhaven Best.
Now the company is subject to a saloon debate all of its own. City bulls and bears cannot agree: is Greene King capable of pulling through the current consumer slowdown, or will it be dragged down further by its borrowings that date back three years to the £774m acquisition of the Spirit Pub Company?
So far the bears have banged loudest on the bar. Greene King shares have had a poor start to the year, tumbling 17pc in 2018.
They are changing hands at less than half the price of their peak in December 2015. The company’s trading update at the end of January did not lighten the mood.
Although chief executive Rooney Anand could boast of another record-breaking Christmas Day in his managed pub estate, snowy weather chilled the numbers across the period.
Divisional sales were down 1.4pc in the first 37 weeks of the financial year, while its tenanted and leased estate saw profits edge up 0.2pc in a similar time frame. The figures prompted a seventh consecutive trading update downgrade by company watcher Nigel Parson, at Canaccord Genuity, who trimmed earnings forecasts for this year and the next two.
Greene King is not suffering alone. Rising business rates, the minimum wage, and commodity and utility costs have squeezed margins across the industry.
Anand has forecast an extra £60m of bills dropping on his doormat this year but is on track to offset most of that through cost savings of between £40m and £45m.
What is ironic is that serving food was once seen as the saviour of the pubs industry but Greene King’s trading has been softest in its “value food” pubs, which analysts at Morgan Stanley estimate account for 18pc of underlying group earnings.
The trouble is that consumers are spoilt for choice. So-called “fast-casual dining” has exploded and well-known chains have begun to take steps to rein in over-expansion.
Hence the closures announced by pizzeria Prezzo, burger seller Byron and Jamie Oliver’s empire.
For its part, Greene King is scrapping its cheap and cheerful Fayre & Square food brand and selling its small Loch Fyne seafood chain.
What is also notable is the well-publicised decline of drinks-led pubs, otherwise known as the local. It has gone so far in some towns that Greene King is often the last man standing.
Young consumers might prop up the bar less and drinking increasingly takes place in the home, but this point alone is worth the bulls getting a round in. So too is the consensus that the group’s dividend, yielding a thirst-quenching 7pc, is safe.
In November, rival group Mitchells & Butlers scrapped its interim payout and the All Bar One owner said it would keep its full-year plans under review. In contrast, Canaccord forecasts Greene King’s divi is covered 1.9 times and cover is growing.
The company has £2.3bn of gross debt, but showed last year it wanted greater balance sheet flexibility with plans to refinance £189m of Spirit bonds at a one-off cost of £43m. If the going gets tougher, it could sell more pubs to pay down borrowings – although this would dilute earnings.
Morgan Stanley raised the prospect of an activist investor arriving on the shareholder register of any of the pub companies, as they have elsewhere in the leisure sector at coffee giant Whitbread and Madame Tussauds owner Merlin.
That could be a catalyst for asset sales, debt restructuring or more sector consolidation.
Questor has followed Greene King closely, recommending in December for readers to sell the shares.
Since then, they have declined 11pc and at this level are worth another look. Pub landlords and restaurateurs face a tough few years ahead but trading on eight times next year’s forecast earnings, it is too early to call time on this particular operator. Buy.