BUY: Greggs (GRG)
Administration thinks there may be potential for “considerably extra” than 3,000 UK retailers, writes Christopher Akers.
Baker Greggs delivered a resilient annual performance regardless of persevering with value inflation pressures weighing down revenue progress.
Whereas consistent with earlier steerage, whole gross sales progress of just about 1 / 4 and an 18 per cent uplift in like-for-like gross sales at company-managed retailers have been a reminder of the energy of Greggs’ model and pricing energy. There was some quantity progress right here, which Shore Capital analysts known as “commendable”.
However this didn’t end in a bounce in earnings. Increased wages, power, and meals and packaging prices hit the underside line, with annual value inflation coming in at 9 per cent. The reintroduction of enterprise charges additionally harm. Regardless of the Financial institution of England anticipating inflation to return down quickly this yr, administration forecasts 9-10 per cent value inflation in 2023.
The corporate will stick with its enlargement plans, nevertheless. The board is focusing on 150 new shops (web) this yr after a report 186 new websites have been opened in 2022 (147 in web phrases).
Greggs additionally revealed that Nigel Mills, former chair of company broking at Citi and a present director at Wooden Group and Persimmon, has been appointed to the board. Such expertise will turn out to be useful as the corporate makes progress in direction of its five-year goal of doubling gross sales.
The consensus goal worth amongst Metropolis brokers is greater than £30, suggesting there are positive aspects to be made for buyers. Whereas the valuation could look demanding at 22 occasions ahead earnings, that is nonetheless properly under the five-year common of 28 occasions. And headway on night gross sales, in addition to the enlargement plans, retains us eager.
HOLD: Johnson Service Group (JSG)
Margins and volumes are practically again to regular — however inflation is tough to include, writes Jennifer Johnson.
Johnson Service Group, the textile rental and companies specialist, has picked up the threads of its enterprise after a number of years of stagnation. The agency’s statutory working revenue rose to £33.3mn in full-year 2022 — up from solely £8.4mn the yr earlier than.
Group margins additionally expanded by 2.2 share factors to 27.2 per cent. This efficiency was largely pushed by restoration in its resort, restaurant and catering division, referred to as Horeca, the place volumes reached 93 per cent of regular ranges within the fourth quarter of final yr.
Vitality prices — which exceeded 9 per cent of income at £36.4mn — have been an ongoing problem for Johnson Service. As of the tip of final month, the group had mounted costs for round 70 per cent of its anticipated electrical energy use and 80 per cent of its estimated fuel consumption for the primary half.
Regardless of the intensifying value pressures, Johnson Service was nonetheless capable of scale back its web debt by virtually 40 per cent to £13.7mn within the 12 months to the tip of December. This was partly due to the improved buying and selling setting, in addition to the instigation of an ongoing £27.5mn share buyback programme. The dividend was reinstated final September.
FactSet dealer consensus places the group’s ahead price-to-earnings a number of at 16.2x for the complete monetary yr. We expect it’s price ready to see the way it fares if and when value pressures ease.
SELL: Hammerson (HMSO)
The retail landlord is narrowing its losses as asset values backside out, however the operational image will not be rosy, writes Mitchell Labiak.
Disappointment finest describes the preliminary market response to Hammerson’s full-year outcomes. Its shares fell 11 per cent on outcomes day as income got here in far under analysts’ expectations and the corporate recorded one other pre-tax loss, albeit a smaller one than the yr earlier than.
The loss earlier than tax gained’t have come as a shock to many buyers. As larger rates of interest drag down property values, many different FTSE 350 actual property funding trusts (Reits) have posted losses for a similar cause. Nonetheless, Hammerson’s weak income was eyebrow elevating. The consensus forecast compiled from FactSet was for income of £235mn, however the firm truly posted income of £131mn, down from £137mn the yr earlier than. Earlier consensus forecasts from Refinitiv present that the Reit has a historical past of failing to satisfy income predictions going all the best way again to 2018.
Hammerson blamed the income drop on a fall in web rental revenue after it bought a few of its property, and confused that like-for-like web rental revenue on the property it nonetheless holds is up, and that the general occupancy of its portfolio is up as properly. “That’s the purpose that I actually wish to emphasise,” chief government Rita-Rose Gagné informed Buyers’ Chronicle.
Nonetheless, promoting property with the intention to develop your income in a falling market is dangerous. Firstly, whereas Gagné insists that the property the corporate has bought and needs to promote are “good” and “engaging”, it’s unlikely to get yesterday’s costs for them. And, though it says like-for-like rental revenue grew over 2022, that was then. There are large questions on whether or not it might probably improve its rental revenue over the course of 2023 with the specter of a recession looming overhead.
Debt additionally stays a problem for the enterprise. Whereas it has diminished its web debt determine, falling valuations and promoting off property imply that its web debt as a proportion of whole fairness continues to be excessive. This might make financing future improvement robust in a better rate of interest setting, particularly when the corporate is behind lots of its FTSE 350 Reit friends when it comes to redeveloping property in order that they will hit harder power effectivity laws coming down the highway.
The low cost to web asset worth could make the worth look interesting to buyers, however paltry dividend funds much less so. What’s extra, a worth/earnings ratio of 13.7 occasions for the following two calendar years, in line with consensus forecasts from FactSet, will not be low cost sufficient for an organization the place revenues are beneath stress.
