Leading analyst Jamie Rollo at Morgan Stanley says he expects sales growth at JD Wetherspoon to continue to slow over the coming years. JDW will announce its FY results next month and Rollo is predicting revenue up 7.6% and like-for-like sales growth of c3.4%.
He said: “JD Wetherspoon will announce its FY results on 11 September. We forecast revenue growth of 7.6%, and EBIT down 2.4%, with the margin down 80bps to 7.4% and EPS up 2% to 48p, in line with consensus. The company reported a record 130bps YoY drop in margins in Q4 (to 7.0%) and stated FY15 PBT is unlikely to be above last year (we forecast flat PBT at £79m). The company did not give forward-looking margin guidance but expects to achieve an underlying profit similar to, or slightly above, that of FY15 in FY16 with an increased second-half weighting. Looking into next year, we expect FY16 EBIT of £112m, marginally below FY15, and we see downside risks to consensus, which is at £116m. The shares are trading on calendar 2016e multiples of 13.6x P/E and 8.0x EV/EBITDA, towards the high end of their long-term range, and with downside risks to forecasts, we remain Underweight.
“Trading trends. The first 10 weeks of Q4 saw LfL sales growth of 2.9%, bringing the year-to-date figure to 3.4%. We expect sales growth to continue to slow, and assume c.3% LfL growth for the next few years. The Coffer Peach tracker reported 1.1% sales growth in July and 1.7% sales growth in June.
“Operating margin. We forecast an EBIT margin of 7.4% for the full year, a drop of 80bps from FY14, and in line with its guidance. The company did not give margin guidance for the year ahead. For FY16, we forecast a margin of 7.0%, continuing the weak margin trend and taking account of cost uncertainties (living wage, repairs and food) and the company’s comments at the Q4 trading update on heightened competition. The National Living Wage is likely to be a significant cost headwind in the coming years, and with weak trading trends and rising cost inflation, we see continued downside risks to margin expectations.
“We estimate 30 new pub openings in FY15 and 25 in FY16, hitting the low end of its 30-40 pub openings guidance. Taking into account the 20 pubs the company confirmed it has placed for sale, we estimate net growth of 5 in 2016. We forecast 20 pubs per year going forward from 2017.
“Dividend and cash flow. We expect FCF per share of 67p, up 5% from FY14, and low- to mid-single-digit FCF per share and EPS growth for FY16. We expect the dividend to remain flat at 12p.”
