In its first reporting period since acquiring rival pub company, Spirit, Greene King has announced that its revenue and profits increased by nearly 50% for the six months to 18 October. The results, which were announced on 2 December, comfortably beat analyst’s forecasts and led to the share price rising approximately 17% over last week.
Greene King completed the acquisition of Spirit on 23 June 2015 to become the UK’s largest managed pub company. The strategy is to create a larger company (with obvious synergies) that can compete with restaurants. Indeed growth of the business is being driven by increasing food sales amid falling alcohol consumption.
Two recent changes in legislation will affect the business going forward. First the introduction of a “living wage” is estimated to cost Greene King £6m a year as approximately 35% of their staff will see their wage increased. This starts coming into force from April 2016. Second the end of the “beer-tie” where pub companies could previously force tenants to buy drinks from them at a premium, in exchange for a reduced rent. Over recent years, the company has reduced the number of tenanted pubs in anticipation of the end of the beer-tie, increasing the percentage of pubs that are managed directly.
Greene King is committed to improving their food offering, investing between £40m and £50m per year in their various restaurant brands. It also owns a large percentage of its pubs. This compares to Wetherspoons which owns none and Marstons which owns fewer in percentage terms. Owning its pubs gives Greene King exposure to the property market and gives it opportunities to raise cash by selling non-core assets. Furthermore, its base in the relatively affluent South East of the UK is helpful. The question for investors is whether these qualities justify the premium that the shares currently trade at over the sector.