Analysts have given their early reaction to JD Wetherspoon’s FY trading update this morning, including Peel Hunt and Langton Capital. The strong like-for-like sales rise has been welcomed but there are warnings that discounting elsewhere many impact performance going forward.

Mark Brumby at Langton Capital said: “JD Wetherspoon has reported numbers ahead of estimates but held its dividend as it sees opportunities for growth or for purchasing assets that are currently leased. The company says that LfL sales will need to rise by 4% this year in order for profits to stand still.

“JDW’s shares have been strong for some time and, though not cheap, the company is a proven operator in tough conditions.

“The group’s shares trade at around 16x this year’s prospective earnings and yield less than 1%.

“Its recent decisions to take branded products from its bars could help margin though, as the company says above, it will need material sales growth in order to hold profits in line with FY18.

“The group does not operate in a vacuum and, if competitors continue to cut prices and offer deals, it could be impacted.”

The Peel Hunt note said: “Trading ahead in early 2019E 2018 PBT rose by 6% to £107.2m (we forecast £108.1m; consensus £105.3m), despite increasing the depreciation charge rate by the equivalent of £5m. LFL sales grew by 5.0%, with trading slowing after the final trading statement, which was three weeks before year end. However, trading in early 2019E is ahead, with LFL sales up 5.5% vs our 3.5% full-year forecast assumption, hence we are holding our forecasts today.

“LFL sales rose by 5.0% (vs a 4.0% comp), of which a small amount was due to favourable weather and the World Cup in Q4. However, without these benefits, LFL sales have remained strong in early 2019E, possibly helped by improving consumer cash flow. 2018’s LFL sales growth was evenly spread, with drink up 5.1%, food up 5.1%, machines up 2.9% and accommodation up 2.3%.

“EBITDA margins rose by 40bps, but EBIT margins were up 10bps due to a 30bps increase in the depreciation charge rate. Labour costs rose by 120bps as a proportion of sales, offset partially by other pub costs falling by 100bps (due to the strong LFL sales). Rent fell by 20bps (to 3.9%) as a proportion of sales, equally offset by repairs rising by 20bps (to 4.2%). Other cost pressures included in these figures were higher utility levies, business rates and the sugar tax.

“The company expects higher costs in 2019E (particularly in utility costs and labour). It claims to have offset some purchasing cost inflation by removing more EU-sourced products. Despite this, it should still need 4% LFL sales to hold LFL profits before cost mitigation, similar to 2018. 2019E’s £7m increase in the interest charge was already built into forecasts.

“JDW opened just six pubs and closed/sold 18 pubs in 2018. The company spent £9.5m on freehold reversions. Due to this and £36.2m of share buy backs, net debt increased by £30m to £726m over the full year. We are holding our 2019E forecasts (and upgrading 2020E slightly), against which the company is trading ahead. As a result, the company is valued at 9x EV/EBITDA, which is not strenuous in our view given that freeholds now account for c60% of the estate, and with sales trading ahead of expectations.”