Berenberg dismisses Greggs as 'past its sell-by date'

19th Mar 2015 11:17

Broker Berenberg has begun coverage of Greggs with a 'sell' recommendation on the fast food chain's shares as the market appears to be ignoring several potential risks ahead.Greggs's recent strategy to focus on its core food-on-the-go market and improve the supply chain has been met with initial success, helping the company pick itself up after struggles in the face of new market entrants and the rapid expansion of other rivals.The strategic overhaul launched in 2013 has provided some initial success, with total sales up 5.5% in 2014 and own shop like-for-like sales up 4.5% - the strongest like-for-like growth since the recession.This contributed to a 40% increase in pre-exceptional operating profits in 2014 to £58.1m. For 2015, management believes market conditions remain favourable: costs are well under control, it should achieve net shop growth of 20-30 sites and, despite being mindful of the strong sales comparatives in 2014, it remains optimistic on the year.But with the stock responding well to the improvement in business performance, analysts at the German bank believe risks still remain in the recovery story that are not being captured in the share price, which is now up 90% since July 2014.The stock trades at 19.8 times forecast 2015 earnings versus UK food service peers on 21.9 times earnings.Berenberg's UK food retail team say potential risks lie in the competitive nature of a market growing at circa 2-6% per year and driven by both like-for-like growth in existing sites and continued roll-outs of new sites from a plethora of competitors such as coffee shops, supermarket convenience stores, specialists and fast food operators.Like-for-like comparisons are expected to become tougher through 2015, demanding more from the existing product offering.Then, while the plan to refurbish stores and exit poorly performing ones has seen initial success, the analysts believe the net store additions will be limited in the coming years and will not contribute materially to top-line growth.Finally, it is likely to be hard for the company to replicate the type of margin growth seen between 2013 and 2014 when EBIT margins rose 1.8% to 7.2%."While management is seeing continued ingredient and packaging cost deflation and an improvement in efficiencies which will contribute to EBIT margin progression in the coming years, we believe much of this is already priced in.""With new competition entering the market and management anticipating the need for 1-2% like-for-like growth for the margins to standstill we see limited scope for future margin progression."Berenberg initiates with a price target of 820p.