A £2.7bn takeover offer from Hong Kong fund giant CK Asset has sent the Greene King (LSE:GNK) share price through the roof. While it’s doubles all round for existing holders, is there any point in value investors buying-in now?
The shares surged 51% up to a 852p valuation, while pub chains Marstons and JD Wetherspoon saw a small complementary share price bump too.
If you’re late to the party, I’d suggest there’s little headroom for the price to improve: on the day of the announcement, one investor dumped £13m-worth of GNK onto the market.
Watch the numbers
Before the bid, the Greene King share price was trundling along in the 575p to 620p range. Earnings per share had not improved on their 2016 high and plateaued around the 50p mark.
2019 annual results showed group operating profits down 1.3% with pub profit margins flat year-on-year at 15.2%. A 2015 takeover of the Spirit Pub Company saw debt shoot up £730m to around £2bn too.
And while CK is acquiring the FTSE 250 firm for a reasonable 8.7 times earnings at 850p a share, a price-to-earnings growth ratio of 3.6 suggests the stock was already overvalued before this massive jump to 52-week highs.
The real reason for the takeover
The purchase is not because CK Asset wants to buy into the struggling pub sector. Troubles in the market have been well documented and recent figures from pressure group Campaign for Real Ale showed that every 12 hours, one UK pub closes for good.
Instead it’s because the Hong Kong fund sees more value in Greene King’s property estate than in its boozers. GNK chief executive Nick Mackenzie, who joined in May 2019 from Merlin Entertainments, noted in the 2019 annual results that as part of debt financing to acquire Spirit: “we carried out an estate revaluation during the year which indicated a market value of £4.5bn, versus a book value of £3.5bn.”
2,700 venues across England, Scotland and Wales equals a huge amount of prime land, and large plots like destination pubs and restaurants could be more profitable if they were bulldozed to make way for housing. This is especially true in London and the south east. Greene King already disposed of 116 “non-core” sites in 2019, building or acquiring only 10 new locations.
Another tipple
Yesterday I looked at two undervalued dividend stocks I really like and as an alternative to Greene King, today I am looking at a drinks giant with great prospects. But it is not cheap. FTSE 100 stalwart Diageo (LSE:DGE) owns a vast portfolio of brands including Captain Morgan rum and Gordon’s gin. Chairman Javier Ferrán increased his stake recently, spending £1m to snap up 300,000 shares. It posted operating profits 9.5% higher in the year to June. EPS leapt 7.4% to 130.7p with management raising the full-year dividend to 5%, up from 65.3p to 68.6p.
Diageo is a long-time favourite of major UK equity funds including Lindsell Train’s UK Equity Fund and its Finsbury Growth & Income Trust. While a P/E ratio of 26 times earnings shows the shares are relatively expensive, the price has doubled in the last five years and a share buyback programme will see £1.25bn spent on re-acquiring stock to improve value for shareholders. City analysts are optimistic about future growth, expecting an average of an 8.3% hike in profits for 2019, margins widening over the next three years with EPS forecast to hit 155p by 2022.
