Berenberg analysts have issued a note ahead of JD Wetherspoon’s full year results announcement this week.
They describe the group as a “category killer” in the value pub market and say the potential for a further £300m of share buybacks over the next three years helps to minimise downside risks.
The note says: “In our view, JD Wetherspoon (JDW) has become a clear “category killer” in the value pub market through its relentless drive towards price leadership and customer satisfaction. We have growing confidence that it can continue delivering solid lfl growth and strong cash generation. Meanwhile, downside risk should be minimised by: 1) levers at the company’s disposal to protect earnings if lfl were to disappoint; and 2) cGBP300m of firepower that could be deployed on share buybacks over the next three years. With the shares trading close to their lowest multiple since January 2017, we upgrade to Buy, and raise our price target to 1,450p.
“Market leader: By accepting lower margins (but higher volumes), JDW has consistently outperformed the wider pub market over a number of years, with lfl growth averaging over 4% since 2012. We think its position is now firmly cemented, with a cult brand, well over one million downloads of its order-and-pay mobile app, and competitors exiting the value segment of the market. We assume lfl growth of 3% can be delivered over the coming years, which may prove conservative. All else being equal, for every 1% increase in lfl forecast, EPS would increase by c10%.
“Focus on cash: Compared with its peers, JDW has a remarkably “clean” cash flow statement, with few “exceptionals”, and one of the highest levels of cash conversion in our entire UK mid-cap consumer and leisure coverage. In our view, the company runs a particularly conservative P&L, with GBP66m of “repairs and maintenance” equivalent to c50% of group EBIT last year. We suspect many peers would have capitalised or simply not undertaken at least a proportion of that expenditure, and believe that higher-quality earnings deserve a higher multiple. At current levels, investors can buy JDW at a c6% FCF yield for sector-leading growth.
“Potential shareholder returns: Management has a clear medium-term leverage target of 3.5x net debt to EBITDA. That level has been maintained since 2015 through share buybacks (reducing the company’s share count by c15% in the last three years alone), and investment in greater freehold ownership (increasing the proportion of freehold pubs from 47% in 2014, to c60% today). If it were to maintain leverage at 3.5x, we believe JDW could spend nearly GBP300m on buybacks in the next three years alone – equivalent to c20% of its outstanding shares at current levels.
“Valuation: JDW currently trades at 8.9x 2019E EBITDA, its lowest multiple since January 2017, with a 6.7% 2019-21E EPS CAGR.”
Analysts corner 2: Berenberg on JDW
Berenberg analysts have issued a note ahead of JD Wetherspoon’s full year results announcement this week. They describe the group as a “category killer” in the value pub market and say the potential for a further £300m of share buybacks over the next three years helps to minimise downside risks.