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Greggs’ Q320 trading update shows a recovery in sales in line with our expectations. There has been good progress: getting all infrastructure up and running, and adapting to the new environment, both in store (including the Click and Collect service) and in generating strong incremental sales from the new Delivery offer. We retain our existing forecasts. The uncertainty about the recovery in sales leaves the EV/sales multiple for FY21e of 1.1x lower than recent multiples.
Companies: Greggs Plc
Greggs’ interim results were heavily affected by the estate closure for the majority of Q220, due to COVID-19. The key takeaways are that operating cash burn during lockdown was in line with management expectations, and current trading, albeit with limited data, indicates gradual weekly progress in revenue, described by management as encouraging. We assume recovery through H121e, before stabilising at a revenue run-rate equivalent to 90% of the level in FY19. The resulting EV/sales multiple of 1.2x for FY21e, is in line with recent multiples. It reflects lower estimated revenue in that year and uncertainty about the rate of recovery.
Sainsbury’s performance during the Q3 and Christmas period was in line with our estimates. The resilience of the food business was comforting but weakness in GM (especially in toys and gaming) was a spoilsport. Online continues to gain strength and management’s plan to increase its contribution to 30% in the mid-term (vs c.20% today) is a step in the right direction. We will tweak our estimates slightly upwards.
Companies: J Sainsbury Plc
The FY18/19 ended on a positive note (earnings were ahead of consensus but in line with our expectations). Despite cost savings, the grocery business remains under pressure, and management needs to stem the market share erosion. Argos delivered synergies ahead of schedule and the reduction in net debt is also a positive development. A revival in banking profits and a grocery sales uplift would be crucial stock price triggers in our opinion. We maintain our positive stance due to the cheap valuation.
Despite a weak start to the year, management is trying to revive consumer demand. This includes steps like investing in essential goods and groceries. While it is a positive step, much more needs to be done. Confirmation of FY19 PBT consensus is a comforting factor. No change in stock recommendation.
Greggs’ trading update for the first six weeks of Q419 highlights an improvement in sales growth. Like-for-like (l-f-l) sales growth of 8.3% follows 7.4% in Q319 and is against a tougher comparative, allaying fears about Greggs’ sales momentum. We upgrade our l-f-l sales forecast for FY19 by 70bp to 8.6% growth, which feeds through to PBT forecasts increasing by 4.6% in FY19 and 2.8% in FY20. Our DCF-based valuation increases to 2,091p.
Tesco’s share price has declined over the past few weeks, and this is despite announcing strong Q1 results. While FY20/21 is likely to be a tough year (benefits of high sales volume and business rate relief offset by the spike in pandemic related expenses), we reiterate our faith in the business strength of the retailer.
Companies: Tesco Plc