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'Greggs’ growth potential looks tasty' says Berenberg as it upgrades to ‘buy’

Last updated: 13:52 10 Aug 2017 BST, First published: 11:56 10 Aug 2017 BST

Greggs' wrap
Expanding its range of healthy options could help to drive growth, say Berenberg analysts

Shares in Greggs plc (LON:GRG) were warming up on Thursday after the popular high street bakery was upgraded to ‘buy’ by German investment bank Berenberg.

Sales have been rising steadily at the Newcastle-based bakery chain recently despite a difficult consumer environment in the UK and analysts at Berenberg don’t expect that growth to run out of steam any time soon.

READ: Greggs' first half sales boosted by salads and breakfast

“After seeing the company present twice we feel increasingly confident that it can continue to achieve underlying growth above the market level,” wrote analyst Ned Hammond in a note to clients.

Hammond adds that Greggs still has a “number of levers it can pull” to drive further like-for-like growth, including extending its balanced choice range, adding further hot food options and increasing penetration of coffee consumption.

More shops, more money

Back in 2015, the Greggs hierarchy said it could expand “substantially beyond 2,000 outlets”, which the analyst believes will also be an important factor over the next few years.

“[Initially] we were concerned by the limited store roll-out, with plans to increase the store base from 1,700 sites capped at 2,000,” said Hammond.

“Given the success of its shift to non-shopping locations, the relatively low store coverage in the southwest and Northern Ireland, and the number of shops its competitors have, we think that Greggs has the potential to expand its store estate substantially in the medium term.

“We thus forecast that it increases its shop numbers by high double-digits pa over the coming years.”

Additional returns on the way for shareholders?

Greggs is targeting net cash of £40mln by the year-end, although if there is a significantly higher amount, it will return capital to shareholders.

Hammond thinks this is very likely.

“Due to the capex involved in the supply chain investment, management has suggested that 2019 is likely to be the next point at which this is possible.

“However, the sale of the Twickenham bakery, which was closed last year, could provide surplus capital sooner.”

Hammond upgraded the stock from ‘hold’ to ‘buy’ today and set a new price target of £13 (was £11.18)

Greggs shares were up 5% in afternoon trade to £11.72.

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