Investment Column: Greene King pays dividends for investors
Vedanta Resources; Brewin Dolphin
Thursday 29 January 2009
Our view: Hold for now
Share price: 421p (+69.25p)
The pub sector's troubles are well documented. The recession has hit an industry already wallowing in the effects of the smoking ban and two summers of miserable weather.
Greene King's generally upbeat interim management statement (IMS) yesterday was therefore something of a surprise, sending the share price up 19.7 per cent. The group said that like-for-like sales in the 38 weeks to 25 January were down 1.1 per cent, which – given the tribulations of some of its competitors – is a stellar performance. In Scotland, which of course is not noted for its alcoholic abstention, like-for-likes were up a very decent 2.4 per cent.
There are many compelling reasons to back Greene King, not least the breadth of its pubs and drinks, which cater for several markets. Analysts are generally upbeat, with those at Evolution urging clients to buy, setting a price target of 495p and arguing that, "Greene King's IMS is comparatively good (damned with faint praise), the balance sheet is sound, with no refinancing event before April 2012."
In valuation terms too, the group should get investors interested: "Our 495p target price is equivalent to a price-earnings ratio (PE) of 7.5 times and an enterprise value to Ebitda of 8.5 times to April 2009." say the Evolution watchers.
At Tuesday's close "the stock was on a PE of 5.3 times and EV/Ebitda of 7.7 times for the same period, with a dividend yield of 7.4 per cent. Greene King is a sensible investment for clients seeking dividend income," they added.
So a nailed-on, screaming buy then? Not so fast. The group is in one of the most toxic sectors around and even the update makes reference to the fact that the company remains "very cautious as to trading prospects for 2009".
We do like Greene King in its sector, but would urge caution. Hold.
Our view: Cautious hold
Share price: 595p (-10p)
A year ago the miners were cock-a-hoop. What a difference a few months makes. As investors started worrying about the prospect of a recession (perfectly reasonably as it turns out), commodity prices dropped like a stone sending miners' share prices down too, and at a rapid rate.
Vedanta Resources, the FTSE 100-listed miner, is a great example. The group's shares have lost more than two-thirds of their value in the past 12 months, 80 per cent since May, and, according to yesterday's production update, third-quarter Ebitda was down by a staggering 98.5 per cent. The group decided not to talk to the press about the numbers yesterday, but generally insists that costs are coming down to reflect the new prices for zinc, down 40 per cent since July, and copper, down 60 per cent.
The silver lining, according to some analysts, is that the stock is undervalued, and this should encourage the brave to take a punt. "Our price target [of 1,250p] is based on circa 0.7 times net present value. We retain our Buy rating due to the growth potential of the company," say those at UBS.
There is certainly value in the group and any recovery in commodity prices will help. However, with the recession increasingly likely to be long and deep, this could take a while. Cautious hold.
Our view: Buy
Share price: 117p (+3p)
All investment managers are in dire straits thanks to the financial crisis, and investors should sell. There is, of course, an exception to every rule and shares in Brewin Dolphin, the FTSE 250 asset manager, have dropped only 20.8 per cent in the last year, a stellar performance for a financial stock.
"Boring is good," says the chief executive Jamie Matheson, who says that his firm's no-nonsense approach to investing in dividend-yielding stocks, gilts and high-grade bonds, means that the group has avoided the worst of the financial crisis.
Yesterday's interim management statement showed overall total income in the 13 weeks to 28 December was down 2 per cent, while investment management earnings were up nearly 4 per cent.
Mr Matheson says he is cautiously optimistic about the rest of the year and that the markets are beginning to slowly stabilise. If this is indeed what is happening, now could be the time to buy. The firm is underrated, say watchers at its house broker Arden Partners.
"Brewin trades on 1.07 per cent of funds under management while [rival] Rensburg trades at 1.5 per cent, and Rathbone is on 3.7 per cent. A valuation of 1.5 per cent funds under management at Brewin gives a target share price of 142p." Buy.
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