Broker snap: Pasty tax U-turn removes risk at Greggs

29th May 2012 11:10

Canaccord Genuity has upgraded its rating for high street bakery and hot snacks chain Greggs now that 'pasty-gate' is over."The government's U-turn on the proposed pasty tax sees the removal of significant financial and strategic risk for Greggs. We did not change our forecasts when this proposal was announced (hence no change to our numbers today) but remain mindful that consensus estimates may rise with a number of other houses having downgraded on the back of the proposals back in March," said analyst Wayne Brown.He said that this resolution should be a positive catalysts for the shares, and it was on Tuesday morning with the stock up 5.68% at 493.1p by 10:58. The shares are expected to recover to their long-term average price-to-earning multiple of 13, against the current 11.2."Whilst we acknowledge that current trading is lacklustre, we view the underperformance of c14% over the past three months as overdone," Brown added.The broker does not expect anything by way of like-for-like volume growth but highlighted the £300m to be invested in estate expansion and supply chain enhancements. "This should help underpin margins, lead to a c30% increase in the group's invested capital base, and a CAGR [compound annual growth rate] of 6.5%, marginally ahead of the group's long-term 6% average."The broker's 520p target price for Greggs now represents 12% potential upside from the current price, hence the rating upgrade.BC