A Greene King Indian pale ale (IPA) beer pump stands on the bar inside the Paul Pry pub, operated by John Barras, a unit of Spirit Pub Co., in Rayleigh, U.K., on Wednesday, Oct. 15, 2014. Spirit, the owner of more than 1,200 U.K. outlets including Chef & Brewer and Wacky Warehouse, said it rejected a 661 million-pound ($1.1 billion) all-share takeover approach from competitor Greene King Plc. Photographer: Chris Ratcliffe/Bloomberg
© Bloomberg

Buy: Greene King (GNK)

Merlin Entertainments’ Nick Mackenzie took over as chief executive this week, spelling a new era for Greene King, writes Alex Janiaud.

Greene King shares fell as much as 7 per cent following a pre-close trading update that revealed a slowdown in like-for-like sales over the last 16 weeks of its financial year.

The pub group enjoyed the Easter weekend. Like-for-like sales were 4.6 per cent higher than over Easter last year, fuelled by good weather and a 15.3 per cent like-for-like rise within subsidiary chain Chef & Brewer. Greene King reported good drink volume growth across the group, particularly within its local pubs, which recorded like-for-like sales of 4.6 per cent over the year. But these sales eased off to finish 2.4 per cent up on last year’s final 16 weeks.

Elsewhere, Greene King continues to pay off its debenture for the Spirit acquisition, and has so far repaid £393m, or 51 per cent. Analysts at Shore Capital believe this could be fully paid down over the next two years. It is also tapping into its £250m securitisation at 3.6 per cent, creating funding headroom.

Shore Capital upgraded its 2019 full-year pre-tax profit forecast from £243m to £247m. The broker expects profits to rise to £253m in 2020, giving earnings per share of 67p.

Greene King is taking cost-cutting measures, targeting savings of £10m-£20m, and it is now on the home straight with the Spirit financing. The share sell-off is an opportunity.

Hold: Standard Chartered (STAN)

With StanChart’s shares still trading at a discount to its book value, the buyback programme looks like the easiest way to return capital to shareholders, writes Alex Newman.

After disappointing outings from Barclays and RBS, Standard Chartered set the benchmark for 2019 bank earnings, after a strong first-quarter trading update beat profit expectations and revealed a surprise buyback plan.

The emerging market-focused lender told investors it had recently received approval to retire $1bn (£767m) of its shares, in a major show of management confidence after a decade of legal headaches and fines, and just three-and-a-half years after a £3.3bn rights issue.

The repurchases, the bank’s first in two decades, are part of chief executive Bill Winters’ goal to generate a full-year return on equity of at least 10 per cent by 2021. In the first three months of 2019, the underlying return on tangible equity came close, swinging to 9.6 per cent from a loss of 1.9 per cent in the final quarter of 2018.

Investec’s Ian Gordon said that while welcome, it was “highly unusual for a bank to announce a share buyback programme with a quarterly interim management statement”, particularly in the context of a 0.3 percentage point decline in the common equity tier one ratio to 13.9 per cent.

However, the board waved through any near-term dip in balance sheet strength, confident that a final $186m charge has resolved “all material legacy conduct and control issues”.

This, together with a net credit of $44m and a 77 per cent quarter-on-quarter drop in credit impairments to $78m, meant statutory pre-tax profit rose 5 per cent to $1.2bn, or 7 per cent on a constant currency basis. The bank also saw a 2 per cent dip in operating expenses, a 5 per cent increase in interest-earning assets, and signs of improved sentiment in its markets.

Buy: GlaxoSmithKline (GSK)

Priced at 14 times forward earnings, the shares trade at a discount to the group’s sector peers on a five-year historical basis, writes Nilushi Karunaratne.

GlaxoSmithKline (GSK) beat consensus sales and adjusted earnings forecasts during the first quarter, with revenue up across all segments (pharmaceutical, vaccines and consumer healthcare) compared with the same period last year. Vaccine sales put in a particularly strong showing, propelled upwards by almost a quarter, thanks to shingles vaccine Shingrix.

However, with increasing competition from generics, adjusted earnings per share is expected to decline by 5-9 per cent over 2019. Notably, the US launch of a generic version of asthma drug Advair resulted in a 23 per cent decline in sales, translating to a 5 per cent reduction in revenue for the established pharmaceuticals division.

A quarterly dividend of 19p was declared, while management reasserted its intention to build free cash flow cover of the dividend to a target ratio of between 1.25 and 1.5, before increasing payments. However, with the initial step-down impact from Advair generic competition, free cash flow declined by almost half to £165m during the first quarter. Nevertheless, the pharma group intends to maintain the annual dividend at 80p a share.

Shore Capital sees an “uninspiring near-term growth outlook”, but GSK’s appeal lies in its future potential. With total research and development expenditure increasing by 11 per cent to just over £1bn, strengthening of the pipeline remains a “number one priority”. Dovato, the first once-daily, single-tablet, two-drug regimen for HIV treatment has already been approved by the US Food and Drug Administration.

Chris Dillow: Housing problems

The UK’s housing market is in a mess. The Royal Institute of Chartered Surveyors is likely to report next week that demand and prices are both falling.

The fact they are doing so now unconfirms two popular theories about what causes prices to rise.

One theory blames high immigration. If this were the case, though, prices should still be rising. Official figures show that net long-term migration was 283,000 in the 12 months to September (the latest available date). That is well above the levels we saw in 2011-14. That house price inflation has slowed as migration has risen suggests the link between the two is weak.

A second theory blames a lack of housebuilding. True, building has risen recently: there were just over 165,000 houses completed last year, a slight increase on the past few years. But building is still lower than before the 2008 crisis, when prices were rising strongly. If a lack of new supply were responsible for driving prices up, prices would still be rising.

If migration and housebuilding are not the drivers of house prices, what are? To see the answer, remember that housing is an asset just like shares or gilts. And the price of assets depends upon people’s willingness to hold the stock of the asset. Just as share prices are not fundamentally determined by new issues or new cash flows, nor are house prices determined by flows of supply. New building last year was only 0.7 per cent of the stock of houses. That’s not big enough materially to move prices.

Instead, what matters are interest rates. There has been a massive negative correlation between the ratio of house prices to earnings and the 10-year index-linked gilt yield: of minus 0.83 since 1986. The main reason for rising house prices since the 1990s has been that interest rates have fallen. This is not simply because lower mortgage rates increase demand for housing. It is also because a lower interest rate increases the present value of future rents and therefore increases the price of the houses that generate those rents; this is why long-term interest rates matter.

Now, for a long time rising prices caused increased mortgage lending to sustain those prices. As Josh Ryan-Collins at University College London shows in his book Why Can’t You Afford a Home?, there was a positive feedback cycle between mortgage credit and house prices.

That process, however, cannot go on forever. For one thing, as Princeton University’s Atif Mian and colleagues have shown, increased household debt eventually depresses growth and increases economic instability. For another, there eventually comes a point at which credit constraints bite and housing becomes unaffordable for many. And for a third, it is possible that the housing market has priced in the good news of lower interest rates but not the bad — that they might well be a sign of lower future growth in real incomes.

This does not, however, mean that house prices will crash. The housing market does not work like that. Instead, sellers are often reluctant to lower their asking prices in the face of weak demand, or even to put their property on the market: the RICS reports that new instructions to estate agents are also weak. This causes prices to be sticky, and housing transactions to fall — something which itself can depress consumer spending. It is only gradually that prices decline. And this suggests that we might be in for a long period of housing market weakness.

Chris Dillow is an economics commentator for Investors Chronicle

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