Greggs Plc (lon:grg)
Greggs – A Good Business But One That I Would Currently Avoid.

Greggs Plc Financials

ItemCurrent PeriodPrevious Period
Year20202019
Period6 Months6 Months
Revenue£300m£546m
Earnings
Adjusted Earnings
EBITDA
Adjusted EBITDA
Statutory Profit(£54m)£29m
Adjusted Profit
Total Debt
Net Debt
Greggs Plc Share Price
Grade:The Orange Grade - Shares That I Think Show Promise With A Few Caveats.
Title: Greggs – A Good Business But One That I Would Currently Avoid.
Company: GRG - Greggs Plc
Share Price Then: 1330p
Author: Ian Smith
Date: Wed 07 Oct 2020
Comments: For me Greggs as a business and as a share price are two completely different things, I rate the business very highly but I rate the shares as quite risky.

A few years ago Greggs gave up being a baker a switched to selling takeaway snacks, pasties, sausage rolls, sandwiches and similar, with many products made centrally in company owned factories.

This was a success, a combination of low prices, earlyish opening and shops the right size for the turnover created profits and a share price mini boom.

By Jan 2020 the share price had soared to around 2,400p and Greggs were on the edge of being a FTSE 100 company, this was a rise from the relatively flat share price around 1,000p-1,300p during 2015-2018.

However 2019 was a best year ever with a profit of £87m so a market cap of £1.35bn which is what the current share price of 1,350p represents gives a P/E of around 15, pretty much the top end of reasonable valuations.

Looking at the H1 number for 2020 and 2019 we see revenue down to £300m from £546m, cost of sales £123m (41%) down from £194m (35%) which are similar ratios and Distribution and selling costs of £210m(70%) down from £275m (50%) which are ouch.

Unlike many other businesses Greggs have been paying their rents, initially quarterly then monthly in advance and prior to COVID were debt free. Currently Net debt is at £26m, reflecting £150m of CCFF loans, the stated loss of £65m and the “using up” of around £70m of cash.

Over the last couple of years the policy was to have around £40m of cash at year end but this had grown a bit, hence the £70m available for surviving COVID.

The plan is to repay and replace the CCCF loan with commercial arrangements where necessary and what this means for dividends seems to be they come second.

Lack of dividends and a relatively high underlying P/E may mean that non tracker owners may not want to remain share holders for the next couple of years, while the loans are paid off.

So is the share price a few month away from doubling or is today’s price something sensible? I wouldn't be too surprised to see the share price being caught in 1,000p-1,400p for the next few years.

My other worry is that Greggs have talked about their click and collect and delivery options and it may just be me but these don’t seem to gel with the product range. McDonalds seem to succeed in locations where a Burger King fails so it is very hard to understand how significant small differences or changes are.

Finally Job Furlough has been a huge help and it is coming to an end, it allowed the shops to be "overstaffed" but at home, now these staff may have to have reduced hours, reduced income or possibly redundancy.

Buying today could leave you stuck in a company that makes a wrong operating model change against an upside of looking for a share price that reflects a very high P/E.
Read Count: 129

Buy/No Buy In A Nutshell
NegativesPossible dividend cuts to help pay off COVID loan may cause share price drop.
PositivesA great business with little debt and great medium term prospects
Initial Review Price1400p
Last Review Price1400p
Last Review Date09-Oct-2020
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