Greggs PLC (LON:GRG) should recover better than its rivals, analysts at HSBC reckon and have upgraded their recommendation on the shares.
The sausage roll colossus “will benefit from its breadth of locations, attractive product mix and strong demand”, the analysts opined.
While underlying sales will take time to recover, the chain is seen as having various advantages as outlets reopen: a stronger mix of food versus drink than most other operators that rely more heavily on higher-margin drink sales “which won't recover quickly with social distancing and queue management from a health and safety standpoint”.
Greggs also has a breadth of sites so can choose areas to re-open where volumes are likely to recover faster, the analysts said, and new initiatives and technologies such as click & collect and delivery could be rolled out faster, giving more options to capture all day trading.
With a current cash burn of around £3.5-4.5mln per week, including monthly rental payments resuming from July onwards, but £150mln drawn from the CCFF scheme, Greggs could last past the end of the year without reopening sites.
“However, with the current plan for sites to reopen in June/July, we expect Greggs to be able to flex its model and generate positive monthly EBITDA by the end of the year,” HSBC’s note read.
But bearing in mind the board’s historical preference to hold a net cash position, the company may consider raising capital in order to decrease debt.
The bank’s decision to upgrade to ‘hold’ from the previous ‘reduce’ ratio came with a new target price of 2,000p and Greggs valued on a rating in line with the average prior to the coronavirus disruption.
“However, Greggs is trading close to its pre-COVID-19 levels (having rallied c20-25% in recent weeks) and, given cost and earnings uncertainty during the next few quarters, and execution uncertainty in the next year, we take a measured view.”