Greene King extends winter rally to 22%

It has a great history of outperforming over the winter months, and Greene King is living up to expectations this year. Graeme Evans explains today's rally.

As followers of our Consistent Winter Portfolio will testify, the colder months of the year seem to work wonders for the Greene King share price.

Maybe it's the popularity of its Sunday roasts or seasonal ales, but whatever the reason the pub chain and Old Speckled Hen brewer has managed share price gains across every winter for the past decade.

This year is certainly no different, with Greene King shares now up 22% since the end of October, including a 6% rise to 588p after today's well-received Christmas sales update.

Given the stockmarket turbulence of recent weeks, that’s a pretty stunning performance. It also means our Consistent Winter Portfolio is looking healthy, with Hill & Smith the other star performer up 19% and Croda International, Howden Joinery and InterContinental Hotels more than holding their own.

Greene King's progress this winter is even better than its 10-year average return of 18%, admittedly helped by its recovery from a sharp sell-off at the start of October.

Source: TradingView  Past performance is not a guide to future performance

With shares still below the 643p peak seen during last summer's World Cup, there are good reasons to think this high-yielding stock has the potential to weather Brexit uncertainty and go further this winter.

At just 8.8x, it trades on a projected price earnings (PE) multiple well below historic levels, despite offering a dividend yield of 6%. Broker Citi has Greene King as its top pick and only 'buy' recommendation in the pub and restaurant sector.

The broker said the pub group had produced another strong update, with like-for-like sales from the managed pub estate up 3.2% for the first 36 weeks of the financial year. The figure surged 10.9% in the last two weeks, helped by record Christmas Day sales of £7.7 million.

In order to hit its full-year forecast for growth of 2.3%, Citi estimates that Greene King now only needs 0.4% like-for-like sales growth over the rest of the period. It estimates that 1% outperformance is worth 3% to earnings per share. 

Barclays, which has a price target of 630p, said today’s update increased its confidence in a full-year pre-tax profit forecast of £241 million. Analyst Richard Taylor added:

"This is clearly a positive statement over a key trading period."

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JP Morgan Cazenove said the like-for-like sales acceleration from the 2.7% reported in the first half suggested the company's strategy of driving demand through an investment in quality, service and value was paying off.

However, analyst Ted Nyhan questioned the sustainability of Greene King's performance given significant discounting at its value-end brands.

With a 520p price target, he added:

"We believe strong trading post H119 period end may fade as the impact of price promotion fades and that future pricing power and margin expansion will be undermined. We cannot see Greene King's shares outperforming the market in this environment."

Much will now depend on the outcome of Brexit, with Greene King wary of the potential impact on consumer confidence and spending. It is also looking for a successor to Rooney Anand, who is due to step down as chief executive in April after 14 years at the helm.

In terms of managing costs, the company is on track to limit inflation to between £10 million and £20 million this year. The pub estate is also being optimised, with the disposal of more than 100 pubs and opening of nine new sites expected this financial year.

At the half-year stage, Greene King operated 2,798 pubs, restaurants and hotels, of which 1,084 were tenanted, leased and franchised pubs. Its leading retail brands include Chef & Brewer, Farmhouse Inns and Hungry Horse, while its Bury St. Edmunds and Dunbar breweries produce Abbot Ale and Belhaven Best.