Business Overview
Greggs Plc (GRG) is a bakery chain operator, grounded in the United Kingdom. The company’s product portfolio comprises of sandwiches, pasta, salads and soup, bread and rolls, platters, cakes and buns, muffins, doughnuts, and biscuits and bakes. Greggs offers these products, with lower fat, calorie and salt contents that provide a healthy diet and nutritional values to its customers. It conducts business operations through its retail shops and bakeries.

Trading Update (as on 14^th May 2019)
Greggs Plc reported its trading report for the first quarter on May 14, 2019. In the first 19 weeks of 2019, the group’s total sales jumped by 15.1 per cent against 4.7 per cent in the corresponding period of the last year. The company’s self-managed stores sales on a like-for-like basis surged by 11.1 per cent against the growth of 1.0 per cent during the same period of 2018. Increased footfalls have driven the sales in traditional as well as in the newly launched products. During the reported period, the baker grocer opened 38 new stores and closed around 22 stores.

Financial Highlights (FY2018, £ million)

(Source: Preliminary Results, Company Website)

In 2018, the company’s total reported revenue for the financial year 2018 stood at £1,029.3 million, a surge of 7.2 per cent as compared to £960.0 million in FY2017. The company’s reported operating profit (eliminating exceptional items & property profits) accelerated by 9.1% to £89.1 million against the fiscal year 2017 of £81.7 million. The group’s reported profit before tax (eliminating exceptional items) stood at £89.8 million, a surge of 9.8 per cent against the financial year 2017 of £81.8 million. The company’s total pre-tax profit stood at £82.6 million (2017: £71.9 million). Basic earnings per share increased by 15.2 per cent to 65.2 pence as compared to 56.6 pence in 2017. The company’s board proposed a final ordinary dividend per share of 25 pence against the 22 pence in 2017. The group’s operating margin before finance expenses and exceptional items was quoting at 8.7 per cent as compared with the financial year 2017 of 8.6 per cent. The total operating margin (including exceptional items) increased by 0.5 per cent (absolute term) to 8 per cent as compared to 7.5 per cent in 2017.

Share Price Performance

Daily Chart as at May-31-19, before the market close (Source: Thomson Reuters)

On 31st May 2019, at the time of writing (before the market close, GMT 1.35 PM), Greggs Plc shares were trading at GBX 2,192, up by 1.95 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 2,205.15/GBX 939. The company’s stock beta stood at 0.73, reflecting lower volatility of the stock as compared to the benchmark index. The outstanding market capitalisation was around £2.18 billion.

Valuation Methodology


Key Risks
A marked decrease in the UK consumer spending could cause a decline in Greggs’ LFL sales growth. The UK food-on-the-go market is already highly competitive and if other players were to become more aggressive, this could affect Greggs’ ability to attract customers. Failure to achieve the anticipated efficiency cost-saving measures or difficulties in implementing supply chain investment could result in a greater impact on margins.

Conclusion
Despite the decent performance of the group in early 2019, there are many crucial uncertainties in the months ahead. Ongoing uncertainties around the Brexit deal is the crucial one, as potential disorderly exit could impact the supply chains, currency exchange rates, tariffs and shoppers demand.  A drop in LFL sales would result in the business being unable to offset inflationary pressures. Gregg’s strategy of estate rebalancing is dependent on opening sites in locations away from the high street. As well as partnering with franchisees in travel or convenience locations. A slowdown here would impact earnings. Disruption to manufacturing capabilities or supply to sites would adversely impact sales.

Increasing manpower costs could impact the cost structure of the company. The main challenge for any food retail companies is to preserve its food products from contamination. The economic conditions are going to be challenging in the rest of 2019. however, inflationary pressure has reduced, but confidence levels will continue to remain low over uncertainties regarding the economic conditions. Weather condition is also a critical factor for the group, and dire wintry conditions and elongated heatwaves strongly impacted last year sales.

Based on the valuation done using the above method, we have given a “Sell” recommendation at the current price of GBX 2,192 (as on 31st May 2019) with high-single digit downside potential based on 16.44x Peers Average NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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