Peel Hunt initiates Greggs at 'buy'

Peel Hunt initiated coverage of Greggs with a ‘buy’ rating and a 1,200p price target.

The brokerage highlighted four key reasons underpinning its recommendation.

It argued there was further growth to come from the reinvigoration of the product offering and freshening up of Gregg’s estate, noting that menu refreshes and products such as the new coffee range generated over £1m in revenue per week in 2015.

Peel also pointed to further expansion opportunities from franchise openings and corporate stores in the UK and Ireland.

“Better cash returns, access to more expensive and previously inaccessible sites and high cash margins are just some of the benefits Greggs has received by pairing up with franchise partners,” it said.

The brokerage estimates that Greggs generates around 10% from franchise system sales, in the form of royalty fees and mark up on commissary sales.

The third reason it mentioned was margin upside from improving store systems and processes.

Peel Hunt said the company has made efforts to improve its systems and processes, beginning with rationalising the bakery network and supply chain.

Greggs paid out around £20m of special dividends in 2015 and going forward, the group is committed to a progressive dividend policy, meaning it currently trades on a yield of around 3%.

“We have not formally included special dividends in our forecasts but highlight the group should be in a position to return c£31m in FY2017 and FY2018, equating to 59p and 60p respectively in total dividends, assuming a £40m head room.”

The total dividend distribution – ordinary and special – would equate to a yield of around 6% in full year 2017.

“Even at our target price of 1,200p, this would be c5% dividend yield, compared with an average dividend yield of c2% against comparable peers.”

At 0950 GMT, Greggs shares were up 1.5% to 1,036p.