Greene is not King
Note to self: don’t just check. Think!
I must have been drunk on Monday. Drunk on the idea of adding brewer, pub and restaurant chain Greene King to the portfolio.
I was seduced, initially, by an error in Sharelockholmes’ record. The database had used the wrong figure, a higher figure, for shareholders’ funds/equity/book value (now corrected). That, and the fact Greene King is a local company of national significance. I eat and drink at Greene King establishments. Oh, and my uncle is from Bury St Edmunds, home of Greene King, and the company is as close to his heart as Ipswich Town football club.
But it was the error in Sharelockholmes that led me astray. I have a pre-analysis checklist that is supposed to spot things that might invalidate the figures that attracted me to the share in the first place. It also highlights things I might need to consider when I come to analyse the annual reports. Things like:
- A qualified report from the auditor
- Large defined benefit pension schemes
- Off balance-sheet operating lease commitments
Significant developments since the last annual report - Data errors
So I checked the company’s price to book value, return on equity, and ratio of equity to assets, the three statistics that led me to think Greene King might be a good prospect, and found them to be rather more pedestrian than reported.
Job done, you might say. Check list completed. Errors found (and reported to Sharelockholmes). Company no longer looks really strong and dirt cheap, it looks kind of average. Time to move on. There may be better opportunities…
You might say that. But for some genuinely unknown reason I ploughed on through a decade of annual reports, adjusting for a bleedin’ share split, and completed my spreadsheet for the results going back ten years.
And then I was disappointed, even though I already knew I would be!
I wasn’t actually drunk but I had the single minded unquestioning tunnel vision of a drunk. For a guy trying to be more efficient, it’s a slightly worrying waste of an afternoon.
Despite my predilection to like Greene King the idea of adding it to the portfolio may have been doomed from the start. I have a general prejudice against pub groups borne out by the near death of over-indebted Enterprise Inns and Punch Taverns. Greene King, is not in their disreputable company but despite investors’ experience I think they still see ‘well managed’ pub chains as safe, high quality investments so there’s not much value hidden in the survivors, and perhaps more risk.
Any way, here, for posterity, and people that don’t share my prejudices, is Greene King’s ten year record. It’s not bad, barring the rights issue and the erosion of shareholder wealth in 2009 but the company is just a bit too indebted, and not quite profitable enough for me to add to the portfolio. Its ten year earnings yield is, at 9%, on the cusp of being good value, so maybe one day…
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[...] from the bookies to the pub, Richard Beddard did up a good post on Greene King. Regular readers will know that I recently bought shares in one of its competitors, [...]
Hey Richard.
Punch taverns is indeed in very bad shape, but I disagree with the statement that ETI is in the same place. It has great cash flow (~85m even after a huge capex) , huge equity which is even bigger since some of its liabilities are tax liabilities which will disappear if pub prices drop, giving investors more cushion.
In addition, it has a good and professional management and it has some great plans and advantages it can use:
1. sell unprofitable pubs for other uses for a good premium. ETI has shown it sells the worse pubs for a larger EBITDA multiple – 29 vs the company’s 12. as it keeps selling bad pubs, it gets more profitable since it uses a pub which yields 3% in EBITDA to close debt yielding 6.5 percent. it will keep doing so as long as it has unprofitable pubs.
2. project beacon- another use for the worse pubs
3. good debt distribution. I don’t know if you looked at it, but unlike punch, ETI has pretty small payments to make until 2018. it can cover most of them with FCF, and what it can’t cover by 2018 – ETI will just sell a few more pubs every year.
4. When and if real estate prices will rise and consumer spending rises to its pre-recession levels, the profit can skyrocket.
5. with a FCF of 85 million, if the company survives until 2019 (I think it will), and with some rise in real estate, ETI may have an equity of 2.2 billion with a much smaller debt(~2B).
on the other hand, the managed pubs seem more dangerous to me. they ofen have nice net profits, but their FCF sucks. the growth they show is misleading, and comes at the expense of their huge capex on existing locations. for some reason the market seems to like them more at the moment.
Why are you so bearish on ETI?
Hi Ardan. Thanks for the comment and all the detail.
I’m not bearish on ETI. My comment related to the past, not the future. I don’t have a view on Enterprise’s future prospects (or Punch for that matter) as I haven’t looked at the company’s annual reports. I didn’t mean to imply that these companies are bad investments, but offer a reason as to why sentiment might be against pub groups in general: that over-leveraged pub groups have given investors a shock.
With that I do agree
Great blog BTW