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Wed 24th Jun 2015 - Douglas Jack – it’s hard to justify a Greene King premium
Douglas Jack – it’s hard to justify a Greene King premium: Numis Securities leisure analyst Douglas Jack has issued a ‘Hold’ note on Greene King shares with a price target of 925p, arguing that it’s hard to justify a premium. He said: “Greene King has completed the acquisition of Spirit Pub Company for 10x EV/Ebitda, before synergies that the company expects to exceed £30m. We are downgrading our stand-alone Greene King profit before tax forecasts by 9%, largely to reflect trading over the last nine months (during which we have been restricted). After factoring in the Spirit acquisition, our earnings downgrades average 5%. We are re-initiating coverage with a ‘Hold’ recommendation. Managed pubs/hotels generate circa 71% of Ebit. This division underperformed in 2015E, albeit against tough comps, with like-for-like sales up 0.4% after 51 weeks, and margins down c.40bps. In comparison, tenanted/leased like-for-like net income was up 3.6% after 48 weeks and own-brewed beer volumes were up 4.1% after 51 weeks. We have altered our forecasts, in part due to weaker trading, and in part due to reduced organic expansion as the company refocuses on the integration of Spirit. We expect the full £30m of synergies to be achieved by the end of 2018E. We are re-initiating with a target price of 925p, equating to 10.7x EV/Ebitdar (Dec-15), slightly below our 11x peer group average target. We believe this is based on cautious forecast assumptions, including 1% per annum of managed like-for-like sales growth. It is difficult to justify a premium valuation, in our view. Greene King’s freehold ratio should now fall to circa 83% from 94% and its cost of debt should rise above 7% post Spirit. Integration risks include the need to rationalise managed brands and possible additional pub disposals, at a time when the company should look to rebuild like-for-like momentum in the managed estate.”

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