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Greene King holds divi despite soaring costs knocking annual profits

The pub industry is having to deal with soaring wages and a hike in business rates, and costs are set to jump again this year

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Costs rose by £14mln last year, even with £35mln worth of cost-saving exercises

Greene King PLC (LON:GNK) frothed higher on Thursday as the pubs group held its dividend, despite soaring costs hitting annual profits.

Revenue rose 1.8% to £2.22bn in the 12 months ended 28 April (2018: £2.18bn), but a £14mln surge in net costs meant operating profits fell 1.3% to £368.2mln (2018: £373.1mln).

READ: Green King toasts market outperformance, but investors hoped for more

Almost every pub and restaurant operator has had to deal with crippling cost rises over the past year, with wages and business rates rises the key contributors.

Despite the dip in profitability, City broker Liberum reckoned the bottom-line performance was actually slightly better than City analysts had been forecasting.

The small beat, coupled with the dividend being held at 33.2p, meant Greene King shares were up 4% in morning trading to 602p.

“The business delivered good results last year, regaining trading momentum in Pub Company and returning to market outperformance while fulfilling a strong cost mitigation programme and making further progress refinancing the Spirit debenture,” said chief executive Nick Mackenzie, who took over from the long-serving Rooney Anand in April.

“The existing strategy we have in place has led the business through challenging times.”

Tough comparatives in 2019

Investors were seemingly ignoring the challenges that have faced the business so far in its new financial year and which are unlikely to let up any time soon.

The FTSE 250 company, which runs more than 2,700 pubs across the UK, said the recent poor weather has dented sales in the first couple of months of the new financial year.

Unsurprisingly, like-for-like sales are down versus last year, when the UK basked in a three month-long heat wave, while the World Cup also boosted 2018 sales.

While the top-line is likely to come under pressure, there is no let up in cost rises either.

Even with an “ambitious” mitigation programme, Greene King still expects net costs to rise by as much as £20mln in the year ahead.

Difficulties ‘to be expected’

“Pub Company LFL sales during the first eight weeks of FY20 are below last year’s strong comparatives of 2.2%,” noted Liberum’s pub analyst Anna Barnfather.

“This is to be expected at this stage of the year due to the poor weather experienced and illustrative of the tough FY20 comps that the Company and industry face.

“The Coffer Peach Business Tracker for May showed a fall of -1.7% in pub LFL sales across the industry, with June also expected to show weak LFL performance across the industry.

“Our LFL expectation for the year reflects the challenging trading environment the industry will face.”

Despite the cautiousness, Liberum has the stock as a ‘buy’ with a price target of 790p, comfortably ahead of the current share price.

Quick facts: Greene King

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LSE:GNK
Market: LSE
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