Investment Column: Right time to raise toast to Greene King
Tuesday 01 February 2011
Our view: buy
Share price: 472.7p (+23.7p)
Investors raised a glass to Greene King yesterday after the pub and brewing company delivered bullish trading, boosted by tasty food sales. The operator of the Old English Inns also reinforced its focus on pub food by acquiring Cloverleaf Restaurants for £55.8m.
For the 38 weeks to 23 January, Greene King's underlying retail sales rose by 3.9 per cent and its Belhaven operation in Scotland also chipped in with growth of 3.6 per cent. More significantly, its retail division expects margins to be "slightly ahead of last year". Such upward momentum is driven by the pub operator's food division, which grew underlying food sales by 8.2 per cent over the period.
Further evidence of Britain's love of pub grub came in the shape of soaring sales up 10.3 per cent at Hungry Horse, its largest retail brand famous for its 17-inch plate. However, there was less fizz at Greene King's brewing business, which makes Old Speckled Hen and Greene King IPA, as own-brewed volumes fell by 3.3 per cent, although this compared favourably with a UK ale market down by 7.6 per cent.
Last year we advised holding the stock, largely on an uncertain outlook for consumer spending, but now think we were too cautious. Despite rising strongly from a 12-month low of 372p in June, Greene King still only trades on a forward earnings ratio of just under 10.
Its acquisition of Cloverleaf – which used the remainder of the £207m Greene King raised in a rights issue in 2009 to fund its expansion – could give its growth a further shot in the arm. Greene King said that Cloverleaf's existing 12 large, freehold pub-restaurants were growing ahead of its own and it will invest about £25m in 10 more sites in the pipeline. Overall, Greene King has proved itself in terms of its balance sheet and profit growth to have a model for all seasons. Buy.
Our view: buy
Share price: 269.5p (-0.5p)
The last time we looked at RPC, it had posted a trading statement showing gains in revenues, sales and prices. Yesterday's update continued the trend, with the plastic packaging supplier reporting higher third quarter results thanks to growth in the personal care and coffee capsule sectors. Revenues were boosted by the improved volumes and higher prices as rising polymer costs were passed on to customers.
At the same time, RPC said its cost- cutting programme was reaching the end, with the company progressing with the closure of its Netherlands site. Such moves – it has shut five sites so far – should keep the business on a firm footing as RPC's markets pick up. A leaner operation will also help the company deal with any wobbles in the wider economy. But should you buy?
In a word, yes. Beyond the strengths of the business, investors should look closely at the valuation, which remains unquestionably thin. In fact, on Panmure Gordon's numbers, the stock trades on multiples of less than 10 times on the forecasts for 2012. The figure falls to below nine times on the broker's estimates for 2013. Given the outlook – Panmure anticipates double- digit earnings growth in the years ahead – this appears far too harsh. Wade in now before the market wakes up to the gap.
Our view: sell
Share price: 56.5p (-21.5p)
MBL may feel that in the business of supplying large retailers, independent stores and export customers with DVDs, CDs and video games, the landscape is shifting under its feet.
This is a market in structural decline, and MBL released an update yesterday that was not for the faint- hearted. Management said the conditions had deteriorated since it revealed in December that trading was "challenging" and yesterday warned that profits would be "substantially behind management's revised expectations".
Competing with online giants such as Amazon and online piracy has proved a struggle for the entire industry, which is increasingly moving digital. Also, MBL's contract with Morrisons has lapsed and now has to enter a competitive tender to win it back. The company is also trying to diversify but admitted the strategy was burning cash. It added yesterday it was no longer in takeover talks.
It has reshuffled management roles at the top to spark a recovery but despite a valuation of 2.14 times estimated earnings in the year to March, we feel investors should stay away.
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