Share Watch: Greggs shares? I’m still chewing it over

One firm has hit on a winning formula, but another’s share price is indigestible – for the moment at least, says Richard Beddard.

This piece was written before the coronavirus severely impacted markets and new restrictions came into force.

A stock market sell-off probably triggered by high valuations and the global spread of Covid-19 is bad news for flighty investors who already own shares, but good news, perhaps, for those who would like to. Almost across the board, shares have got cheaper, if you believe they will survive the short term and prosper in the long term.

This month, I have reviewed two firms that have been rolling out business plans like clockwork. Such is my confidence, I’ve added Hollywood Bowl to the Share Sleuth portfolio.

Hollywood Bowl

The formula for the UK’s biggest operator of tenpin bowling centres involves two new centres a year plus a handful of refurbishments. It locates the new centres alongside other leisure attractions such as cinemas and restaurants, and fits them out with the latest iteration of its Hollywood theme, earning about half of revenue from bowling and the rest from food, drink and amusements. It’s also trialing a new (for Hollywood Bowl) concept: indoor crazy golf centres. The chain, if it develops into one, is called Puttstars. This year Hollywood Bowl will open Puttstars in Leeds, Rochdale and York, and then it will pause to evaluate them.

The returns have been impressive since Hollywood Bowl floated in 2016, and growth has been steady. Return on capital was 20% in the year to September 2019, while revenue increased 8% and adjusted profit increased faster than usual, by 14%. There will be many factors behind these stats, but beyond the format I think it comes down to reputation and culture. Success breeds success and landlords are looking out for good tenants, which probably makes it easier for Hollywood Bowl to secure the prime sites it seeks. The company also supports and motivates its managers to run the centres “as their own business”.

The shares cost 250p, putting the company on an enterprise multiple of about 18 times adjusted profit. I score them 7.2, which means to my mind they’re good value.

Greggs

The formula at Greggs involves opening rather more outlets every year; it opened 138 new stores (and closed 41) in the year to December 2019. If you have not visited a Greggs in the last decade or so, just about everything about it has changed bar its ethos. Greggs has transformed itself from a chain of baker shops supplied by in-store and regional bakeries, to a chain of fast food outlets, increasingly situated away from the high street in industrial estates or railway and motorway service stations. It still sells pies and pasties of course, but many of its hot sellers these days are vegan, supplied by Greggs’ new centralised supply chain.

Store openings helped revenues to increase by 13% in 2019, but partly thanks to the vegan menu, existing sites grew revenue 9%. As the cash-rich company has transformed itself, it has grown steadily more profitable, allowing it to reward shareholders with a special dividend and staff with a special bonus. As at Hollywood Bowl, Greggs’ corporate culture is probably a significant factor in its success, and so too is its strategy of vertical integration, which gives it more control of product quality and cost than rivals.

A share price of £20.90 values the enterprise at about 28 times adjusted profit, which is a bit rich for me. However, this is a Share Sleuth company in all but price, and as we are seeing, that may change!

Dialight

By contrast Dialight is not running like clockwork. In the space of a few years and at great cost, Dialight has outsourced and then brought back in-house the manufacture of the LED lighting fixtures it supplies. The company has a commanding 27% share of its heavy industrial niche, but it has been unable to earn outsized returns because of inconsistent demand and high manufacturing costs, which it has yet to demonstrate it can control.

Share Sleuth’s favourite five

Score Name Description Interactive Investor link
8.4 XP Power Manufactures power adapters for industrial and healthcare equipment http://bit.ly/swXPP2019
8.3 Victrex Manufactures PEEK, a tough, light and easy-to-manipulate polymer http://bit.ly/swVCT2019
7.9 PZ Cussons Manufactures personal care and beauty brands, in the main https://bit.ly/swPZC2019
7.7 Goodwin Casts and machines steel. Processes minerals for casting jewellery and tyres http://bit.ly/swGDWN2019
7.7 FW Thorpe Makes light fittings for commercial and public buildings, roads and tunnels http://bit.ly/swTFW2019

Note: Shares are scored out of 10, according to five criteria: profitability, risks, strategy, fairness and value.

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