Questor share tip: Greggs offers a tasty opportunity for investors

Greggs

440.3p +3.6p

Questor says BUY

Greggs shares have been drifting lower for some time, but Questor continues to believe that the company offers a tasty opportunity over the medium term.

The shares have been falling as investors fretted about costs in the second half. With the amount of headlines being generated from rising wheat prices, these concerns are very real. However, the company has pricing power to deal with this.

In the six-month period to July 3, sales rose 2.9pc to £321m, with like-for-like sales up 0.7pc. Although the bulk of the growth was from new store opening, the fact that the group managed to grow revenues from its older stores is reassuring – albeit that this growth was only slight. Pre-tax profits in the period rose 12.3pc to £18.6m.

The interim dividend was increased by 5.8pc to 5.5p a share, payable on October 1. New investors would need to buy the shares before September 1 to qualify for this payment. The shares are now yielding a prospective 3.9pc, rising to 4.2pc next year.

Questor advised buying the shares because of the group's ambitious growth plans. Greggs aims to boost its network of shops by 40pc to 2,000 over the medium term, adjusting its supply chains to cut costs.

The company said last week that it was now ready to make the first investment and is "on site" at its new bakery in Newcastle upon Tyne, which will replace the existing Gosforth bakery. In the first half of the year Greggs opened a net 18 new stores and has reiterated its target of 50 to 60 net new stores in the year - last week's results statement was headed: Expansion Plans On Track.

The group has a very strong balance sheet, with net cash rising from £14.9m to £24.6m over the 12-month period. This impressive level of cash generation should fund the group's expansion plans without the need for external funding. The cash balance represents 5.5pc of the company's market capitalisation.

This figure following a £4.5m share buy-back at an average price of 450p, in line with plans announced in March to return up to £15m of cash to shareholders.

The shares are trading on a December 2010 earnings multiple of 12.4 times, falling to 11.3 next year. Despite the cost headwinds, Greggs is expected to post growth in earnings per share of 8pc in 2011. The shares were tipped on August 12 last year at 400p and they are now 10pc ahead compared with a market up 12pc. Buy.