ShoreCap rates Greggs a 'sell' as working from home hits business model

Analysts at Shore Capital have issued a ‘sell’ recommendation on Greggs shares, arguing that more people working from home during the Covid pandemic was a “game changer” for the High Street baker.

Greggs on Wednesday said it expected to post a full-year pre-tax loss of £15m, reflecting the impact of the pandemic and associated lockdowns, and added that it did not see a return to pre-Covid profitability until 2022 at the earliest.

ShoreCap retail specialists Clive Black and Darren Shirley said the latest national lockdown, imposed by the government on Monday, meant the first quarter of fiscal 2021 would see a “probable heavy hit” to earnings.

“We believe that the stock should trade on an ongoing earnings multiple of 12-13 times, which to us means very significant downside potential for the group’s shares,” the pair wrote in a note, adding a target sell price of 1,780p.

They said “the legacy of coronavirus upon society, its ways of living and working, works against Greggs’ prevailing business model to us”.

“It is a game changer, which most probably notably reduces the long-term growth potential of the group, noting that within its growth plans outlined in March 2020 around 80% of new stores where to be located in Work/Travel locations!”

“How many of such potential locations will remain viable in a post Covid world? Hence, the Group’s vaccine bounce is to us an opportunity to exit without too much collateral equity portfolio damage.”

“With a loss-making FY2020 in tow, a notable hit to full-year 2021 and the drag of working from home and all its effect thereafter, the grounds for Greggs’ equity to be structurally de-rated are, we are sad to say, strong; to argue that Greggs stock should be re-rated is abject nonsense in our view.”

Greggs shares were up 8.93% at 1,939p at 1140 GMT.