How Greene King extended November rally to 12%
29th November 2018 09:56
by Richard Hunter from interactive investor
Greene King shares have risen every winter for the past decade. Richard Hunter, head of markets at interactive investor, looks at results to see if they'll make it 11 in a row.
Careful balance sheet management and the tailwinds of good summer weather and the World Cup have left interactive investor Winter Portfolio constituent Greene King in a strong position.
Half-year adjusted pre-tax profit has increased 3.2%, while the return on capital figure remains a healthy 8.5%. Like-for-like sales within its pub estate have not only grown but have outstripped the sector, helped in part by the reduction of competition in the face of ongoing pub closures elsewhere.
Meanwhile, the disposal of non-core pubs allows the reinvestment into new sites, with this "estate optimisation" continuing to underpin the balance sheet. In addition, the group remains cash generative to the extent that it can comfortably cover capital expenditure, debt repayments and, of particular interest to investors, the dividend payment.
The current yield of 6.5% is punchy in a low interest rate environment and the dividend has become something of a guarantee from Greene King over the years.
Source: TradingView (*) Past performance is not a guide to future performance
There may be fewer competitors, but the fight for both food and drink-led business is intensifying. Meanwhile, the omnipresent spectre of Brexit looms over prospects, particularly if it results in subdued consumer confidence.
The net debt figure, while manageable in current conditions, is significant and will need careful ongoing management. Cost inflation is another area of focus, since the clear pressures of running a business such as this can easily explode, particularly if they are due to reasons outside of the company's control.
Nonetheless, Greene King is working actively to address potential issues, and with some success. The hike in the share price over the last three months of 5% does not, unfortunately, extend to the last year, where the shares have drifted 3.6%, as compared to a 7% fall for the wider FTSE 250.
The market is fairly divided on prospects for the immediate future, but on balance consensus for the shares edges towards a 'buy'.
*Horizontal lines on charts represent levels of previous technical support and resistance.
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