Greggs finals

The leading bakery food-on-the-go retailer in the UK, with almost 1,700 retail shops throughout the country.  I have a holding in my income portfolio (epic code: GRG).

Greggs announced their full year results on 4 March, which confirmed their trading update (commented on here).  Total sales were up 5.5% to £804.0m (excluding the impact of accounting for a 53^rd week in 2014 sales grew by 3.9%) and own shop like-for-like sales were up 4.5%.

 

Pre-tax profit excluding exceptional items (mainly redundancies and shop closure costs) was up 41.2% to £58.3m and reported pre-tax was £49.6m an increase of 48.6%.  Adjusted EPS increased by 41.8% to £43.4p and reported EPS rose by 54% to 36.8p.

 

A final dividend of 16.0p per share was declared, making 22p for the year an increase of 12.8% and covered 1.67x by earnings, which equates to the company retaining just over 40% of its earnings.  This follows a freezing of the dividend in 2013, so is a welcome return to dividend increases.  The management have also stated that they have capacity to return up to £10m to shareholders in the first half of this year and so will resume a share buy back programme.  A buy-back is a poor use of funds, especially with the current share price at over 4x book value.

 

Free cash flow (FCF) was strong at £51.3m compared to £23.9m last year and was sufficient to pay the dividends of £19.6m and increase net cash by £29m to £53.6m.  The net cash position was flattered by £6.4m of profit share commitments, that previously would have been paid in the reporting year, but will not be paid until March 2015.  The company intends to run with a net cash position for the foreseeable future, due to the leasehold nature of the store portfolio.    

 

With respect to the current year management have stated that "...Overall we are confident of delivering a further year of good growth and progress against our strategic plan in 2015..."

These were a very good set of results and met expectations that had been increasing during the year.  Greggs' ROCE is over 19% and their 3 year average FCF return on capital was 14.5% compared to their weighted average cost of capital of just over 8%. 

With a share price today of 1004p they are rated at 21.4x this year's earnings and have a prospective yield of 2.4%.  So while the shares may be perceived to be fully valued for now, on a longer view, using a discounted cash flow basis, if management could grow FCF by 7% pa for the next 10 years and we assume 3% growth after this in perpetuity, then the intrinsic value of the business is 1375p discounting it by its 8.2% cost of equity; which would imply a safety margin of 37% at today's price.