Greene King holds dividend as cost hangover hits profits

Greene King served up a short measure of profits after a challenging half-year for the brewer and pub operator, but the interim dividend was held amid an upturn in recent weeks and progress on cost savings.

Revenue of £1.03bn in the 24 weeks to 15 October was down 1.2% on the equivalent period last year as the UK consumer spent more cautiously and the pub sector faced "unprecedented" cost pressures from the National Living Wage, higher business rates and increased costs of goods, contributing to an 8% decline in adjusted profit before tax to £127.9m.

Like-for-like sales from the managed pubs business dripped 1.4% down versus a market that was -0.2% lower in the period, while operating profits fell 11.4% to £136.9m.

The much smaller Pub Partners business increased LFL net profit 1.5% even though revenues were down slightly, while the Brewing & Brands unit increased own-brewed volume 0.3% and revenues 7.9% to overtake Pub Partners, though adjusted operating profits were flat.

Greene King said the managed business underperformed the market it its value food brands, most pubs not being able to fully use outdoor space through August and September, competitor discounting at a "two-year high", and management holding back on capital investment in the previous year.

In response to this, £10m has begun to be invested to improve trading performance, said chief executive Rooney Anand, while the business is also on track to deliver £40-45m of cost savings to mitigate the expected £60m increase in costs this year.

"The first half was challenging for our managed pubs, but our actions to strengthen performance have produced an improvement since the period end. We have committed additional investment to enhance the customer experience, including being more competitive on price, having more team members available at key times and strengthening local marketing activity."

Anand said the business was benefitting from its ongoing ability to cut costs and to improve investment returns to over 25% from rebranded pubs.

"Greene King is a strong, competitive business with industry-leading brands, a strong and flexible balance sheet, a sustainable dividend and an excellent track record of outperforming in challenging conditions. We are adapting our strategy to ensure we continue to sustain our long-term competitiveness, strong cash generation and attractive returns to shareholders."

Although earnings per share were down 8.3% at 33p, the first half dividend was unchanged at 8.8p.

Following the period end, GNK has started to refinance the debt from its Spirit pubs acquisition, taking on a new £350m revolving facility in order to prepay £189m of bonds, with a £43m swap penalty.

GNK shares fell below 500p in early trade and by midday were still down 3% on the day at 525.5p.

Broker Numis said LFL sales were weaker than expected and the PBT of £127.9m compared to its forecast £130m, while the decision to invest £10m in value, service and quality "imply mid single digit downgrades to consensus estimates we believe".

Analyst Tim Barrett said the market is likely to focus on securitisation covenants following rival Mitchell & Butler's recently announced decision not to pay an interim dividend. The effect of refinancing the Spirit debt is to reduce GNK's interest payable by circa £10m pa from 2019, he noted.

Mike van Dulken at Accendo Markets noted that the shares were retesting of last week’s five-year lows.

"Decent growth in Brewing and Brands was no match for cost pressures on the key Pub division and investors clearly see risk in challenging first half trading conditions continuing, the consumer still cautious and cost pressures hanging round. And management confidence is clearly lacking with no increase in the first half dividend something it hasn’t failed to offer since 2010/11."

After Mitchells & Butler plunged 10% last week to revisit summer lows, only to recover all its lost ground and more, van Dulken wondered if Greene King might be set for a similar recovery from its current hangover.