Investors’ Chronicle: Greggs, Next, Goodwin

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6th January 2023

Greggs (GRG)

Sausage roll seller Greggs warned in its fourth-quarter trading update that it is feeling the heat from “material cost inflation”. In this context, chunky revenue growth and the maintenance of full-year guidance underlines the resilience of the brand and business model.

Like-for-like sales growth of 18 per cent for the three months to the end of December helped full-year total revenue hit £1.5bn, an uplift of more than a fifth on the previous year and 30 per cent ahead of pre-pandemic. Customers are flocking to the company’s increased number of stores — 2,328 at the year-end — despite cost-of-living pressures. Greggs’ product range and pricing clearly remain attractive in the battle for custom in a recessionary environment.

And expansion continues, with another net new 150 stores expected to be opened in the 2023 financial year. Diversification is paying off, with “strong growth in digital and early evening sales”, as more of the company’s shops offer delivery and dinner options (such as pizza and goujons). A year-end cash balance of £191mn, meanwhile, is at a reassuring level.

Panmure Gordon analyst Alex Chatterton said that “there is no change to the long-term investment case” despite challenging cost inflation. We agree. Greggs is valued at a premium to the general retail sector, with the shares trading at 20 times Panmure’s 2023 earnings forecast, but this is justified by the company’s leading high-street position and its long-term growth prospects. Analysts think there is a share price uplift opportunity available for investors, with the shares 23 per cent and 13 per cent below Panmure’s and the FactSet consensus target price respectively. Buy.

Next (NXT)
Next has increased its profit guidance after a strong Christmas period, writes Jemma Slingo.

Full price sales at the retail group were up 4.8 per cent in the nine weeks to December 30, despite the management predicting a 2 per cent fall. As a result, Next has increased its full-year profit before tax forecast by £20mn to £860mn, which is 4.5 per cent higher than last year.

In-person sales drove growth and management said it had underestimated the negative effect that Covid-19 had on shopping last year. The December cold snap also gave a “dramatic boost to sales” following an “unusually warm” autumn.

All eyes are now on the year ahead. Next said there is still a “high level of uncertainty”, but it expects full price sales for the year ending January 2024 to be down 1.5 per cent against the current year. Meanwhile, profit before tax is expected to drop by 7.6 per cent to £795mn.

Cost price inflation is due to peak at 8 per cent in the spring/summer season, before dipping to no more than 6 per cent in the second half. Pressure will be eased by lower cotton and polyester prices and new sources of supply. A weak pound could remain a problem for Next, however, as 80 per cent of its contracts are negotiated in dollars.

It is also worth keeping an eye on surplus stock. Management said markdowns are “still somewhat higher than our ideal”, and rivals such as Marks and Spencer have highlighted the danger of too many clearance sales. Hold.

Goodwin (GDWN)
A refocus on end markets appears to have had a beneficial impact on the group’s workload, writes Mark Robinson.

The threat of further windfall taxes and increased scrutiny in the approvals process provide major disincentives for companies engaged in oil and gas production. Reluctance to commit upstream capital has a negative impact on service providers to the industry. So, given recent UK government intervention in this area, it’s unsurprising that engineering group Goodwin has moved away from this corner of the market into other areas of business.

The group’s workload is up by 54 per cent at the half-year mark to £242mn. The mechanical engineering division has been building volumes within the military and nuclear waste reprocessing markets, both of which offer countercyclical benefits.

The refractory engineering division has also been performing strongly but, elsewhere, it may be premature to imagine that capital spending within the mining industry is set to pick up appreciably given wider economic challenges.

Chair Timothy Goodwin said that the increased clamour relates to “US and UK government procured components for military ships and boats, nuclear power, along with nuclear waste storage products”. This has driven the group top line, while operating profits were up by a fifth to £9.8mn.

Operating cash flow was held in check by increased working capital provisions, but cash pressures should ease over the medium to long term as capital investment programmes come to an end at the Hoben International and Duvelco businesses.

The increased workload should underpin sales growth, but deteriorating macroeconomic and geopolitical events mean that some companies have become more hesitant to implement capital programmes. Therefore, management now guides for a “modest increase in annual pre-tax profit rather than a substantial increase”. Hold.

Original article here: https://www.ft.com/content/e54901e8-e8d4-499a-bcfa-d15442601afe

Alex Chatterton

Vice President, Research Analyst, Consumer & Leisure

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