Greene King has developed a reputation as a leading pub company combining a consistent record of successful earnings growth and a meaningful dividend yield. Now 80% larger by market cap than its nearest peer, it continues to lead the consolidation of the sector. Its latest acquisition, of Spirit Group, is integrating well, which significantly underpins earnings and dividend growth over the next two years.
The interims signal that the integration of Spirit, acquired in June, is ahead of plan, and synergies have been raised from £30m to £35m worth c 15% of annual earnings. Spirit adds 1,207 pubs, boosting the estate by c 60% to 3,069. The synergies mean growth worth c 9p per share is baked in over the next two years, giving good visibility on around 70% of consensus EPS growth to April 2017.
Interims were strong. EPS were up 15% to 34.5p and the dividend was raised 6.3% to 8.45p. PBT grew 46.9% to £121.3m, although this was mainly on Spirit – existing businesses grew 6%. Retail like-for-like sales growth of 2.0% compares well with muted national trends, although operating margin shaded 20bp on investment in service, and operating profit rose 49.8% to £137.4m. The Pub Partners tenanted and franchised business grew like-for-like net income 2.4%, and operating profit 0.4%. Brewing & Brands increased operating profit by 5.1% on own-brewed volume up 3.6%. Net debt of £2,079m was up £710m on the acquisition, although at 4.2x EBITDA it is reasonable given that 83% of the estate is freehold.
Greene King is some 80% larger by market cap than its next pubco peer, Mitchells & Butlers. It has steadily grown its market cap by some 150% over the last five years. Growth has been part-driven by acquisitions, including in the past Morland, Old English Inns, Laurel, Belhaven, Hardys & Hansons, Loch Fyne, New Century Inns, and Capital Pub Co. Spirit, acquired for £763m plus the assumption of £837m net debt, is therefore the latest in a long line of successfully integrated assets.
The shares recognise the enhanced growth as well as market opportunities that Spirit brings, on an FY16e consensus P/E of 14.1x. But with double-digit earnings growth and allowing for a yield of 3.3%, that is not much more than a PEG of 1x.