Investec upgrades Greggs and eyes 1,250p price

The broker said the near-three-year repositioning of the FTSE 250 company for the food-on-the-go FOTG market will continue to open up more long-term growth opportunities as it undergoes a further multi-year investment programme to transform its operations, driving value creation alongside a shop estate roll-out.

Alongside the 2,000-store roll-out, Investec said the ongoing churn away from the traditional high street to higher-contributing locations focuses on the work, out of town and travel markets, from a current share of 27% up to 40%, was another pillar to the investment case.

The five-year investment programme is expected to drive long-term change through a centralising of systems and processes, with a £6m target of EBIT benefits by the end of 2018, while Greggs' vertically integrated manufacturing and distribution network is being transformed.

In March, Greggs said it was closing three of its 12 bakeries, in Twickenham, Edinburgh and Sleaford, as part of a £30m net investment programme to help it increase its outlets "substantially" beyond 2,000.

Management expect to generate an incremental £10m EBITDA at the end of the investment cycle, adding 100 basis to EBITDA margins,

Investec believes the strength of cash generation could support a £20m-plus capital return per annum from 2017.

Analyst Alaistair Davies said he had only included the store roll-out in current forecasts, with three of the other pillars of the investment case offering 6% upside to his 2018 pre-tax profit of £89.6m, with an additional longer-term margin opportunity from reorganising the manufacturing and distribution network.

He said the trading update on 9 May could be a "potential positive catalyst", forecasting LFL sales rising 3.5% for January to April, implying circa +3% for March and April, an improvement on the +2.3% reported in the four quarter of 2015 despite reported difficult trading conditions in March and April for the retail sector which has kept footfall at modest levels.

A forecast 9% total shareholder resturn (TSR) in 2016 and 13.5% in 2017 "compares with cash-returning retail peers offering average TSRs of 8.8% and 10.3% respectively", he added.

"In our view, a combination of higher TSR, potential for upgrades and the possibility of incremental capital returns can justify a premium rating relative to General Retail peers."

Investec's target price was set at 1,250p.