Broker snap: Margins a concern at Greggs

10th Aug 2010 12:38

There is still the prospect of 'jam tomorrow' from Greggs even though the doughnut seller was cautious in its outlook for the second half of 2010.FinnCap notes that the snack food seller has partial cover on wheat and other ingredients for the latter part of the year and expects raw material prices will subside in response to fundamentals, but the broker is expecting the company to experience an increase in ingredient costs. The company will doubtless seek to pass these increased costs on to the consumer but "given an austere economic background, and Greggs discount positioning, one could be forgiven for seeing risk in this development," FinnCap analyst David Stoddart suggests.Stoddart intimates that the broker is contemplating reducing its full year pre-tax profit estimate of £51m on the basis of the cautious revenue outlook and the risk to gross margins.The company is sharply increasing capital expenditure (capex) but, based on current forecasts, Stoddart thinks the company is eminently capable of funding this without taking on debt,"Its financial position remains a key strength. Support from buy-backs might disappear in response to the capex increase. Lowered forecasts also remove an element of support. Nevertheless, the shares do not appear over-valued. We retain our hold recommendation pending forecast changes following the results meeting," the broker concluded.