Greggs’ substantial progress with the brand transformation, backed by savvy use of social media, helped to deliver robust FY18 results, in spite of weather extremes, and an outstanding start to FY19. Consequently we have upgraded our forecasts three times since late November. The company is highly cash generative and likely to distribute part of the substantial cash balance (FY19e: £92.9m) with the H119 dividend.
Greggs is smartly engaging social media to raise the profile of its brand, which has successfully transitioned into a leading food-on-the-go format, and draw new customers into the shops. In spite of weather extremes, the broad and innovative freshly-prepared ranges helped to deliver FY18 like-for-like (l-f-l) and total sales growth of 2.9% (H1: 1.5%, H2: 4.2%) and 7.2%, respectively, and a 9.8% increase in underlying PBT. In the first seven weeks of FY19, widespread publicity of the nowfamous vegan sausage roll contributed to outstanding l-f-l sales growth of 9.6%.
Greggs has made significant inroads into strategic plans set out in 2013, and the vision for brand repositioning continues to evolve at pace. Trials of online ordering for collection and delivery are underway in select locations, with demand for the latter typically highest in the evenings when shops have traditionally been closed. 37% of shops are now in travel and workplace locations, with a mid-term objective of 60%.
After a third unscheduled upgrade (of 8%) in February we leave FY19 operational assumptions unchanged. Against a weak, weather-affected H1 comparative we factor in 6% l-f-l growth, reducing to a potentially overcautious 1% in H2. Our FY20 forecast assumes 2% l-f-l sales growth and slight margin improvement. Both our FY19 and FY20 forecasts have reduced by c 4%, purely to reflect the non-cash impact of IFRS 16, which the company, along with peers, will adopt this year.
Greggs’ shares trade c 8% below our DCF valuation of 1,897p, which assumes revenue growth beyond FY21e of 6% cautiously faded to 2% and a perpetuity EBITDA margin of 15.7% (2021e:14.8%). Our EV/EBITDA peer comparison implies 1,804p. The company is highly cash generative and is expected to distribute surplus cash in excess of £40m (FY19e: £92.9m) with the H119 dividend.