Like all retailers, Greggs is, presumably, waiting with baited breath for the end of the second lockdown in England next week (Miles Costello writes). While the latest set of restrictions on trading haven’t been as onerous as the first, trading at the previously booming bakery chain has been seriously disrupted. Even when shops in England are permitted to trade freely from December 2, a complex set of tiered restrictions will further complicate life for the business.
From an investment perspective, trading in the near term has to be uncertain. The shares might have recovered somewhat since the latest update in September, but they remain way off their pre-Covid highs.
Greggs was founded as a delivery business on Tyneside by John Gregg, who opened his first shop in Gosforth in 1951. The retailer, a constituent of the FTSE 250 with a market value of close to £1.9 billion, trades from more than 2,000 stores nationwide, selling salads and healthier foods alongside its signature sausage rolls.
Over the year to December 28, when the world had barely heard of the coronavirus, Greggs reported a near-one-third increase in pre-tax profit to £108.3 million on a double-digit rise in revenues to almost £1.17 billion. It was even considering the possibility of paying a special dividend at the half-year stage.
How life has changed. In July, having had to shut its estate in late March, it reported the first pre-tax loss — of £65.2 million — in its history as a listed company. The idea of a special payout was abandoned and the interim dividend was scrapped as Greggs drew on the government’s cheap financing scheme and furloughed thousands of its 25,000-strong workforce.
However, the company was able to reopen its stores in July and trading began to recover, such that by the end of September like-for-like sales had returned to more than two thirds their level over the same month the previous year.
Greggs restarted its stores opening programme, aiming to open a net 20 new outlets by the end of this year, and stepped up its online presence, agreeing a delivery deal with Just Eat Takeaway. The chain’s ability to adapt swiftly will have helped to support trading during the second lockdown, which mean that its shops are open for takeaway and delivery only. Nevertheless, sales are bound to be sharply down against the same period last year.
Under the three-tier restrictions that will be in force until the spring, Greggs will be allowed to open as normal, but banded curbs on socialising are likely to drag trading lower. Over the year, analysts at Jefferies are forecasting that revenues will drop by almost 35 per cent to £761.8 million and that the chain will suffer an overall loss before tax of £86.3 million. While the broker expects a recovery, it doesn’t believe that profits will return to last year’s levels until 2022, at which point it thinks that dividends will resume, at about 40p a share for the year.
Greggs will get through this. The retailer has shown its ability to defy the bleakness of the economic backdrop. Its high street shops seem capable of bouncing back quickly, although city centre locations and travel hubs such as bus and train stations look likely to struggle while much of the nation’s workforce continues to work from home.
In spite of their falls, the company’s shares — off 46p, or 2.5 er cent, to £17.99 — are not cheap. Based on Jefferies’ forecasts, they trade at a multiple of 43 times next year’s earnings for a prospective yield in 2022 of 2.2 per cent. That doesn’t look tempting for a buyer, but those already in should sit tight and await the recovery.
ADVICE Hold
WHY Despite their recent weakness, the shares look dear and the prospect of dividends again looks distant
Tullow Oil
For those who enjoy the swashbuckling excitement of drilling for oil in far-flung corners of the globe, Tullow Oil used to be the name to watch (Emily Gosden writes). In its heyday at the start of the decade, it spent its time striking black gold in new frontiers and drawing up plans for blockbuster developments.
Even after oil prices crashed in the middle of the decade, Tullow stuck to its raison d’être, raising cash so that it could pay off debt and get back to its favourite business of exploring.
No more. After disappointing discoveries and production, as well as another oil price crash, brought the company to its knees, Tullow has launched a new strategy that relegates exploration to a fringe activity. Under Rahul Dhir, 54, its new chief executive, Tullow will focus instead on maximising its existing oilfields in west Africa, working on “short-cycle, high-return opportunities within our current producing asset base”. Ninety per cent of its capital expenditure will be devoted to optimising these assets.
It aims to generate enough cash that it can gradually reduce its $2.4 billion net debt and, eventually, reward long-suffering shareholders.
Production, which stands at about 75,000 barrels per day so far this year, is expected to fall in 2021, but Tullow aims to boost it thereafter and to sustain it at about 70,000 barrels per day. If the oil price averages $45 next year and $55 thereafter, it reckons that, post-investment, it will generate $4 billion of free cashflow this decade for debt service and shareholder returns.
This year Tullow’s debt situation looked so precarious that it had to warn about it future. The sale of its Ugandan assets and cost-cutting have helped to ease the pressure, but debt maturities loom next year and in 2022, putting refinancing risks on the horizon.
Crude prices may be rebounding, but macroeconomic uncertainties persist and oil producers are unloved in an increasingly climate-conscious world. Tullow also has to win back trust and prove that it can deliver its promised production. Even if it can navigate all these challenges, the new strategy, however sensible, offers little by way of excitement.
ADVICE Avoid
WHY Significant debts and uninspiring prospects
