Broker snap: No turning point in sight for Greggs, says Canaccord

9th Oct 2013 11:14

Canaccord Genuity has retained its 'sell' rating and 330p target price for bakery chain Greggs, saying that while the third quarter saw some improvement its underlying investment case remains unchanged. Greggs said that like-for-like sales in the 13 weeks to September 28th fell by just 0.5%, much better than the 2.9% decline experienced in the first half and better than Canaccord had expected.However, as the broker pointed out, total sales growth of 3.6% still lagged the 5.9% growth seen the year before."Profits will continue to come under pressure over the next two to three years as the group invests in refurbishments and strategically repositions the business towards a 'food-on-the-go' model," said analyst Wayne Brown."This does not come without execution risk alongside the shift of the model into a sub-sector that is probably one of the most competitive in the UK retail landscape." Greggs also lowered its guidance for shop refits and said it doesn't expect an increase in net new shops this year as openings are countered by closures; it had previously estimated a net 20-30 new shops. "We are not sure whether this indicates the tail of the estate has grown or management are more aggressively tackling the structural challenges the group faces," Brown said.The analyst has cut his profit before tax estimate slightly for 2013 from £40.8m to £40.3m, compared with last year's £51.9m."With an increasing focus on returns on capital and considering profits are forecast to fall by a compound annual growth rate of 7% over 2012-2015E, we think a material improvement in cash flow return on assets is required to return us to a more positive stance."The stock was up 1.78% at 434.9p in mid-morning trade on Wednesday.BC