Shore Capital downgrades Greggs; points to 'post-lockdown strains'

Shore Capital downgraded its stance on shares of bakery chain Greggs to ‘sell’ from ‘hold’ on Friday as it pointed to "post-lockdown strains to come" and the potential for earnings per share and valuation pressure.

"The coronavirus crisis is a disaster for Greggs," ShoreCap said, noting that 2020 will see an earnings and dividend wipeout.

"We would expect rebuilding in the years thereafter but with a somewhat depleted balance sheet," it added.

The broker said it will take "some years" to rebuild to FY2019 earnings per share as new norms impact Greggs' earnings from a sales and cost perspective.

"Indeed, social distancing and behavioural change, less commuting and a decline in employment, could represent a perfect storm for Greggs," said analysts Clive Black and Darren Shirley.

"Whilst an adaptable and very well-operated business, strong management and a leading value proposition are all virtues, we feel that 19.6x peak earnings (FY2019) represents an unfavourable risk-reward equation given that medium-term earnings could be materially lower than pre-coronavirus levels.

"As such, Greggs could be structurally de-rated on a lower earnings base."