Greene King - cheers to a great compounder

After a ending last week with a cinema tip we start this week with a trip to the pub as Greene King have announced an interim management statement today. This looks fine in my view with headlines being: retail like for like up 5% in the last 6 weeks and 3.8% year to date, average EBITDA per pub in Pub Partners up 5.6% and strong growth in Brewing & Brands; core own-brewed volume up 5.8%.

Finally, in the outlook statement the Company said "Overall, our expectations for profit, cash flow and our balance sheet are unchanged and we remain confident that we will continue to provide growth in earnings and dividends, and improving returns, to our shareholders."

Which is what this one is all about really as they say "the board’s policy of maintaining a minimum dividend cover of two times underlying earnings, while continuing to invest for future growth, and maintains our long-term track record of annual dividend growth."

I bought this one back in May 2009 during their rights issue at the time and achieved an average in price of around 444 pence so at the time it would have been on a prospective rating of around 9 x and a 5% net yield. Having held it patiently since then I have seen the dividend rise from 21 pence to a likely 28.4 pence forecast for this year which would represent a compound growth of 6.26% per annum over 5 years and a 6.4% yield this year on my original purchase price. They have achieved similar rates of growth for a lot longer than that too.

Since then the shares, like the market, have risen and been re-rated to stand on a prospective 13.7 x and 3.39% yield for the year to April 2015 according to Stockopedia. This seems reasonable without being outstandingly cheap, so having doubled my money in 5 years or so and having enjoyed a total return of around 20% per annum including the dividends I am happy to hold for more of the same. However, given the re-rating since I bought them I would not expect such strong returns in the next 5 years, unless it get re-rated even further, which I am not forecasting. Assuming it can at least maintain its current rating then it looks like total returns of around 9 to 10% per annum should be on the cards (circa 3% yield + 6 to 7% growth). Of course things could cut up rough and valuations come back down again, but I am prepared to run that risk with this one.

Finally, you should be aware of the financial risks in this one as they geared up in the 90's and the 2000's as that was the fashion back then with the likes of Enterprise Inns and the financial engineering which was rampant at the time. From their 2013 report and accounts they observe the following:

"Financial credit metrics remain strong. Fixed charge cover has improved to 2.7x from 2.6x and interest cover has also improved to 2.9x from 2.7x. Annualised net debt to EBITDA has reduced to 4.7x and will continue to improve as we maximise the annual EBITDA returns from the underlying business and our investments in new sites. Our securitised vehicle had a FCF debt service cover ratio of 1.5x at the year end, giving 29% headroom."

While on the Pension front they said:
"At the year end, there was an IAS 19 pension deficit of £63.8m, which compares to £67.3m at the previous year end. The movement is primarily driven by the exceptional gain following the closure of the scheme to future accrual.
Total cash contributions in the period were £10.1m for both past and current service."


So you have to be comfortable with the level of debt in this one. Though it is a more leveraged balance sheet than I normally like, since most of it is secured on or backed by property assets and it is a fairly steady business, I am prepared to live with it in this case but as ever you pay your money and take your choice - cheers.

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