Leading analyst Douglas Jack at Peel Hunt has changed his recommendation on JD Wetherspoon’s shares from Hold to Reduce ahead of the pub company’s update next week, in a note entitled “Sometimes it is better to travel than arrive”.
Jack said: “Wednesday’s (12th) trading update should be strong, but investor focus should now shift to 2018E, a year for which we/consensus forecast profits to fall against a backdrop of significantly higher operating costs and a weaker consumer outlook.
“Despite it underperforming in the last recession, JDW is valued at a premium to its freehold peers on most metrics. Take profits.
“The 2017 results should beat consensus (PBT £90.0m), in our view. Our £91.5m PBT forecast assumes LFL sales remain at 3.5% and EBIT margins grow by 55bps. We view 2017 margins as the main source of upside risk.
“However, the outlook for 2018E is very tough, in our view: LFL sales will need to grow by 3-4% to maintain profits; a scenario that equates to a 25bps margin reduction. For consumers, inflation (c3%) is forecast to exceed average earnings growth (2.0-2.5%) over the next year and, given consumer debt levels, the MPC’s hawkish comments on interest rates are alarming.
“Our 2018E forecasts assume that LFL sales rise by 3.0% and margins fall by 20bps, anticipating further price increases. It is not encouraging that JDW underperformed its freehold peers in the last consumer recession, with LFL profits falling for five consecutive years (from being -6.6% in 2008). JDW has a 54% freehold estate versus an 88% average for its freehold peers (Fuller Smith & Turner, Greene King, Marston’s and Mitchells & Butlers).
“Despite this, a worse LFL sales track record during the last recession similar LFL sales (2.9% vs the peer’s 2.6% pa average) and worse margin (-27bps vs -13bps pa average) track record since 2007, JDW trades on an EV/EBITDA premium to its freehold peers. Given the valuation and consumer outlook, we are cutting our recommendation to Reduce.”