Broker snap: Growth to continue at Greggs

17th Mar 2011 10:06

Greggs made good progress in 2010 against its shop roll-out and cost control plans, and this is expected to continue into 2011 despite a challenging retail environment, according to UBS.The popular bakery chain announced 2010 results Wednesday that were broadly in line with the broker expectations, with pre-tax profits 5% higher than estimates. Like-for-like (LfL) sales growth for the first 10 weeks of the current year was 0.4%, in line with company guidance and UBS's first half expectations of 0.5%.The company opened 93 shops and refitted 135 outlets in 2010, and established a new-style fit for the 'food to go' shops. The broker expects a further 80 to be opened in the current year with 160 refits (60 of which are to be in the new format)."We think this incremental space growth and brand development alongside initiatives such as fresh coffee and an enhanced breakfast range, should deliver mid single digit sales growth in 2011 with marginally positive LfL sales progression," says analyst Isabel Green.A 'buy' rating is maintained, while the target price is raised from 520p to 550p.In a note entitled 'Bap to the future', finnCap makes a case for upgrading its "buy" rating on Greggs from "hold"."Greggs has several attractions in what appears set to remain a difficult UK retail market for the foreseeable future. It has a sustainable position as a discounter in a large defensive market," claims finnCap analyst David Stoddart. "The business has a long-term track record of healthy cash-generation. That was highlighted by last year's share buyback programme at the end of which Greggs retains a net cash balance, another source of strength. So far, management's attempts to drive structural change through the business appear to have been successful without causing cultural damage. This offers scope for further self-help gains to offset external pressures," Stoddart continued."In the longer term, there are opportunities to boost productivity in the stores as well as the earlier supply chain," Stoddart maintains.The broker has switched its target price calculation methodology from a figure based on 2010 earnings per share to a discounted cash flow model, and upped the target price to 540p from 465p.