Analysts at Goodbody have updated their forecasts for Greene King and JD Wetherspoon.
At the former the analysts see a general underperformance continuing, while for JD Wetherspoon is described as the group’s “preferred choice in the UK eating/drinking out sector for 2018”.
The analysts said Q3 had been “another challenging quarter for Greene King”, and reduced the EBIT forecast by c.2% in FY19 and c.1% in later years.
They said: “Pub Company like-for-like sales continued the run rate from H1 of -1.4% yoy. Poor weather in early December was a headwind. However, given the calendar was favourable over Christmas (like-for-likes were +1.6% yoy for the 2 Christmas weeks) and the £10m value-service-quality (VSQ) investment made at the beginning of the quarter, we would view this as disappointing. Furthermore, the two other divisions within the group have weakened, with like-for-like net income in Pub Partners and own-brewed volumes in Brewing & Brands both negative in Q3 following positive trends in H1.
“We viewed the Q3 statement as disappointing and expect trends in Q4 to be more challenging due to a difficult consumer backdrop and intensely competitive market. We continue to believe that Pub company’s performance is: (i) suffering from the acquisition of underinvested sites from Spirit; and (ii) will take longer to reverse than many might suspect. On top of that, cost pressures will persist in FY19 and competition is likely to increase in 2018 (this can already be seen in the form of aggressive discounting among food-led brands recently). We update our valuation methodology for our new forecasts and set a new PT of 455p, reiterate SELL.”
On JD Wetherspoon, Goodbody said: “Following the strong Q2 performance, we increase our EBIT forecasts by 2-3%. Our like-for-like sales assumptions going forward are unchanged and we continue to expect growth to moderate to 2.5-3.5% from here (due to slowing market growth and the World Cup, which normally has a negative impact on JDW sales). However, given the current run rate of 6% this could prove conservative.
“The continued like-for-like sales acceleration is particularly impressive given slowing market data. New menu initiatives and estate investments have undoubtedly contributed to this. Furthermore, the order & pay mobile application continues to gain impressive traction (now >2.3m downloads). The group is trialling a pizza offering that could be launched later in the year. We believe this could be a good fit for the group and provide an incremental growth opportunity.
“JDW continues to be our preferred choice in the UK eating/drinking out sector for 2018. Our concerns about the performance of the overall market this year are well flagged at this stage. However, JDW is well-positioned to outperform in such an environment. For those that our concerned about the valuation premium vs. peers, we would point to (i) better FCF conversion; (ii) superior trading trends; and (iii) long term track record of steady profit growth; as legitimate justifications for this. We update our PT to 1400p and reiterate BUY.”
