Greggs Plc - Investment thesis

We recently initiated a position in Greggs Plc. The below is a summary of our investment thesis outlining the rationale of purchasing Greggs shares as well as the key risks we identified.

The pitch was shared at Commonstock as our entry in the September Idea Competition. If you like this pitch, click on the link to upvote our post and share your thoughts.

---

Introduction

Our selection is Greggs (LSE: GRG, Market Cap of £2.01B), a bakery chain known for sausage rolls which transformed into a modern vertically integrated UK food-on-the-go retailer, providing a wide menu of food and drink choices. Greggs is being around for over 80 years in UK and serves consumers through 2,239 stores (401 are franchised). In the first half of 2022, Greggs generated £694.5M sales and £55.8M Pre-tax profit.

During the last 10 years it depicted a Revenue and Operating income CAGR of 6.9% and 12.3%, respectively, with an average operating margin of 8.0% and average Return on Equity of 19.5%, whereas its share price grew by 425%.

Greggs has a cash position of £147.5M, undrawn facilities of £70M and lease liabilities of £290.9M.

Source: Koyfin, StockOpine analysis

Thesis

1. Growing number of stores boosting revenues

Greggs plans to increase its number of stores from 2,239 to +3,000 by 2026, adding (net) 150 stores per annum, doubling its revenue from £1.23B in 2021 to £2.4B in 2026.

Although the target set (Capital Market Day 10/2021) is ambitious, it is not necessarily unachievable given that Greggs added on average (net) 97 stores for 2017-2021 (excl. 2020). The target was recently reaffirmed by management.

Source: Greggs Capital Markets Day, Oct 2021

2. Increase in Revenue per Store

• Over 2012 – 1H 2022 (“Current/LTM”), Greggs grew revenue per store by a CAGR of 3.4%. An acceleration is expected as Greggs extends opening hours, adds delivery to more stores and as it enhances its CRM platform.

Source: Greggs filings, StockOpine’s analysis

• Evening Trade: Management expects to extend opening hours of stores, where meaningful, to at least 6pm (normal closing hour used to be 4pm). Currently, 300 stores are open until 8pm and the plan is to reach 500 stores by year end.

  There is a significant upside from extending trade (35% of food-on-the-go market) since it would allow offering of wider range of products at higher prices (e.g. Sausage roll £1.2 Vs Southern Fried Goujons £2.75).

• Delivery:  Beginning of 2021: 600 -> today: 1,180 and plan for 1,300 by the year-end. Delivery can be margin dilutive, but sales accretive (small switching level) as it reaches more customers and has higher basket size.

3. Attractive Valuation

Source: StockOpine’s analysis

The estimated value per share is £25, 27.0% higher than our entry price of £19.7 on 16th of September (screenshot below), with a resulting IRR over a 5-year period of 16%.

• Revenue is based on management target, which per our recalculations translates into a) accelerating Revenue growth per Store (+7% CAGR) driven by Delivery, Evening Trade and Loyalty/CRM and b) the increasing number of stores.

• Terminal margin of 17.5%, lower than the average of 18.8% (2016-2021, excluding 2020) due to investment requirements as stores are added and due to a higher weight of delivery sales compared to the current 7% of total sales.

• Discount rate represents the minimum required return that we aim from our investments (i.e., 10%) and it is higher than the estimated WACC of 9.6%.

• EV/EBITDA multiple of 9x is similar to its 5Y average (9.1x), excluding 2020, and slightly higher than its current multiple of 8.4x. Despite this, it is lower than the median 13.9x of UK selected peers.

Potential upside / downside (%) by changing EBITDA multiple and Discount rate

Source: StockOpine’s analysis

Risks

1. Execution risk

• Roisin Currie, CEO recently succeeded Roger Whiteside and as there is no record to assess her abilities there is an execution risk. Nevertheless, Roisin is with the company since 2010, knows the culture and values and was selected across internal and external candidates.

2. Fragmented market

• There is competition from Cafes like Costa Coffee and Starbucks, bakeries such as Wenzel’s the Bakers and companies like Krispy Kream UK and Subway. Despite the competition, the long track record, the competitive pricing position and the increasing number of stores demonstrate Greggs’ strong competitive positioning in a fragmented market.

Source: Statista, Bakery Market Report (WilliamReed), StockOpine’s analysis

3. Inflation

• Even though Greggs is vertically integrated, it is not immune to inflationary pressures (ingredients, energy) and thus some costs will be absorbed, where others, would be passed to consumers (price hikes already took place in 2022).

• Unexpected increase in CAPEX may delay store openings. For instance, estimated CAPEX per shop increased from c. £275,000 (Oct 2021) to c. £325,000 per interim results.

Remarks

We initiated a position in Greggs on 16th of September as the 27% upside provides sufficient margin of safety considering the risks identified above.

---

On another, we would also like to thank Conor for bringing Greggs to our attention.

Disclaimer: The team does not guarantee the accuracy or completeness of the information provided in the newsletter. All statements express personal opinions based on own financial and business analysis. Any estimates or forward looking statements made are inherently unreliable. No statement of opinion is an offer or solicitation to buy or sell the financial instruments mentioned.

The content of our newsletter is not a trading or investment advice and we do not provide any personal investment advice tailored to the needs of any recipient. The information provided should not be considered as a specific advice on the merits of any investment decision. Securities trading involve risk and you might lose your capital and/or incur other damages. Investors should make their own research and consult their registered investment advisor or financial advisor before taking any investment decision.

Neither the team nor any of its affiliates accept any liability whatsoever for any direct or indirect loss however arising, from any use of the information contained herein. Any unauthorized copy of this newsletter or its contents is illegal.

By subscribing / reading our newsletter or any affiliated social media accounts, you indicate your unconditional acceptance to the above and your unconditional acceptance to our terms and conditions.

We have a long position in the shares of Greggs.