Shares in Greene King are almost as cheap as its discounted beers and ales.
After moving to Hampshire in late 2008, I soon sought out my local pub.
Pubs for all punters
What I found was a very pleasant local, with a wide range of beers, a mixed clientele and surprisingly low prices. Thus, for the past three and a half years, I've been a regular drinker at this inn, which is run by leading pub operator Greene King (LSE: GNK).
What has impressed me about my local -- apart from its low prices and cheerful service -- is how it caters to a wide range of visitors. It has cut-price deals for students and regulars (including Greene King's Season Ticket discount card), decent food for diners served until 9pm, and pricier wines and spirits for the more discerning tippler.
Hence, I've been looking over Greene King's shares to see if they offer similar value to my local hostel. Today, GK (as it's known in the pub trade) released a trading update, giving me a chance to get to grips with its latest trading trends.
Going for growth
Greene King runs around 2,400 pubs, restaurants and hotels across Great Britain, via brands such as Hungry Horse, Old English Inns, Loch Fyne Restaurants and Eating Inn. It also brews Greene King IPA (the UK's top cask ale), Old Speckled Hen and Abbot Ale.
In the 50 weeks to 15 April, GK revealed "strong trading," with retail like-for-like sales up 4.5% in the past 13 weeks. Like-for-like food sales were up 6.7% over the same period, with average EBITDA (earnings before interest, tax, depreciation and amortisation) per pub up 3.8% over 48 weeks.
Commenting on these results, chief executive Rooney Anand said: "Our strong trading momentum continued through the final thirteen weeks. March was very strong, helped by the warmer weather, while February was in line with the previous year, despite tough comparatives."
Anand attributes GK's above-average growth to investment in the eating-out market, plus new spring menus launched across its estate before Easter. Also, GK is expanding its estate, with 37 new sites acquired or developed in 2012 so far, taking its Hungry Horse portfolio to 180 sites. The group is also ditching under-performing pubs, with 97 non-core disposals in the year so far.
In the brewing sector, GK's own-brewed volumes were up 0.8% over 50 weeks, versus market shrinkage of 4.5%. This was aided by a £4 million re-launch of Greene King IPA, plus two new ales: Greene King IPA Gold and Greene King IPA Reserve.
Cheap beer, cheap shares?
GK's boss goes on to remark: "Following a record Christmas, we achieved very strong like-for-like sales growth on Valentine's Day, Mother's Day and St Patrick's Day." In addition, Anand is looking forward to more sales boosts from the Queen's Diamond Jubilee, the Euro 2012 football tournament and the London 2012 Olympics.
With 50 pubs a week closing in the UK, GK's performance is mighty impressive. Then again, are its shares as cheap as its beers?
As I write, GK shares trade at 519.5p, up 0.5p on the day. This values the group's equity at over £1.1 billion, making it one of the bigger firms in the mid-cap FTSE 250 index. However, at its latest year-end, GK had more than £1.4 billion of debt. Thus, this high leverage and operational gearing put its shares at higher risk of a debt-related setback.
Then again, GK shares trade on a forward price-to-earnings ratio of 10.1 and offer a prospective dividend yield of an above-average 4.7%, covered a healthy two times. Although its growth isn't expected to shoot out the lights, analysts expect GK's earnings per share to rise by 6% in 2012-13 and 4% in 2013-14, allowing for decent increases to its yearly dividend.
In summary, my view is that value investors and dividend seekers should take a sip of Greene King's shares. If the pub group can increase its operating margins and keep growing its estate at the expense of its competitors, then Greene King shares could rise as easily as a pint of Greene King IPA goes down!
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