Investors’ Chronicle: Greggs, Johnson Service Group, Hammerson

BUY: Greggs (GRG)

Management thinks there is potential for “significantly more” than 3,000 UK shops, writes Christopher Akers.

Baker Greggs delivered a resilient annual performance despite continuing cost inflation pressures weighing down profit growth.

While in line with previous guidance, total sales growth of almost a quarter and an 18 per cent uplift in like-for-like sales at company-managed shops were a reminder of the strength of Greggs’ brand and pricing power. There was some volume growth here, which Shore Capital analysts referred to as “commendable”.

But this did not result in a jump in profits. Higher wages, energy, and food and packaging costs hit the bottom line, with annual cost inflation coming in at 9 per cent. The reintroduction of business rates also hurt. Despite the Bank of England expecting inflation to come down rapidly this year, management forecasts 9-10 per cent cost inflation in 2023.

The company will stick to its expansion plans, however. The board is targeting 150 new stores (net) this year after a record 186 new sites were opened in 2022 (147 in net terms). 

Greggs also revealed that Nigel Mills, former chair of corporate broking at Citi and a current director at Wood Group and Persimmon, has been appointed to the board. Such experience will come in handy as the company makes progress towards its five-year target of doubling sales.

The consensus target price among City brokers is more than £30, suggesting there are gains to be made for investors. While the valuation may look demanding at 22 times forward earnings, this is still well below the five-year average of 28 times. And headway on evening sales, as well as the expansion plans, keeps us keen.

HOLD: Johnson Service Group (JSG)

Margins and volumes are nearly back to normal — but inflation is difficult to contain, writes Jennifer Johnson.

Johnson Service Group, the textile rental and services specialist, has picked up the threads of its business after a few years of stagnation. The firm’s statutory operating profit rose to £33.3mn in full-year 2022 — up from only £8.4mn the year before.

Group margins also expanded by 2.2 percentage points to 27.2 per cent. This performance was largely driven by recovery in its hotel, restaurant and catering division, known as Horeca, where volumes reached 93 per cent of normal levels in the fourth quarter of last year.

Energy costs — which exceeded 9 per cent of revenue at £36.4mn — were an ongoing difficulty for Johnson Service. As of the end of last month, the group had fixed prices for around 70 per cent of its anticipated electricity use and 80 per cent of its estimated gas consumption for the first half.

Despite the intensifying cost pressures, Johnson Service was still able to reduce its net debt by almost 40 per cent to £13.7mn in the 12 months to the end of December. This was partly thanks to the improved trading environment, as well as the instigation of an ongoing £27.5mn share buyback programme. The dividend was reinstated last September.

FactSet broker consensus puts the group’s forward price-to-earnings multiple at 16.2x for the full financial year. We think it’s worth waiting to see how it fares if and when cost pressures ease.

SELL: Hammerson (HMSO)

The retail landlord is narrowing its losses as asset values bottom out, but the operational picture is not rosy, writes Mitchell Labiak.

Disappointment best describes the initial market reaction to Hammerson’s (HMSO) full-year results. Its shares fell 11 per cent on results day and the company recorded another pre-tax loss, albeit a smaller one than the year before.

The loss before tax won’t have come as a surprise to many investors. As higher interest rates drag down property values, many other FTSE 350 real estate investment trusts (Reits) have posted losses for the same reason. Statutory revenue of £131mn was marginally down on the 2021 comparator, but the shortfall was more pronounced on a proportionately consolidated basis. Gross rental income at £90.2mn was broadly flat on the prior year.

Hammerson blamed the revenue dip on a fall in net rental income after it sold some of its assets, and stressed that like-for-like net rental income on the assets it still holds is up, and that the overall occupancy of its portfolio is up as well. “That’s the point that I really want to emphasise,” chief executive Rita-Rose Gagné told Investors’ Chronicle.

However, selling assets in order to grow your revenue in a falling market is risky. Firstly, while Gagné insists that the assets the company has sold and wants to sell are “good” and “attractive”, it is unlikely to get yesterday’s prices for them. And, although it says like-for-like rental income grew over 2022, that was then. There are big questions about whether it can increase its rental income over the course of 2023 with the threat of a recession looming overhead.

Debt also remains an issue for the business. While it has reduced its net debt figure, falling valuations and selling off assets mean that its net debt as a proportion of total equity is still high. This could make financing future development tough in a higher interest rate environment, especially when the company is behind many of its FTSE 350 Reit peers in terms of redeveloping assets so that they can hit tougher energy efficiency regulations coming down the road.

The discount to net asset value may make the price look appealing to investors, but paltry dividend payments less so. What’s more, a price/earnings ratio of 13.7 times for the next two calendar years, according to consensus forecasts from FactSet, is not cheap enough for a company where revenues are under pressure. Sell.

In a previously published summary of Hammerson’s results, reference was made to a FactSet consensus full-year revenue forecast of £235mn set against the reported IFRS figure of £131mn. The comparison was invalid because the FactSet consensus estimate was an adjusted figure, reflecting proportionally consolidated revenue. On this basis, adjusted revenue fell by 15 per cent to £275mn.