Leading analysts, Douglas Jack and Ivor Jones of Peel Hunt, give their views on JD Wetherspoon, ahead of the group’s Q3 trading statement next week.
The note says: “For the Q3 trading statement, due on 9 May, we expect LFL sales to have slowed, reflecting tougher comps and March’s snow, but year-to-date they should still be ahead of FY assumptions. We expect to maintain our FY forecasts that assume 4.5% LFL sales (vs 6.1% in H1) and 40bps EBIT margin growth (vs +80bps in H1).
“LFL sales slowed to 3.8% in the first six weeks of H2, but would have been at c5.5% without March’s snow. The comp toughens slightly to 4.0% in Q3 (vs 3.3% in H1), but this should not be a concern: JDW has extended its LFL outperformance over the pub sector to 4% (restaurants 5%) over the last year.
“Pub sector trading is more correlated to the weather than consumer cash flow in the short term. In recent weeks, neither will have been helpful, hence we expect small downgrade risk in pubs (possibly greater in restaurants) during May’s update season. As a value, town-centre operator with drink accounting for 61% of sales, JDW’s should be less affected than most others.
“H1’s 80bps margins rise was mostly due to LFL sales growth (we suspect machine LFL sales growth), rather than tail-end disposals. Higher costs have been well publicised and built into forecasts; offsetting this, we expect greater LFL price growth in H2 (we estimate that drink prices increased by 2.1% in December; and the company intended to raise sugary drink prices by c10p).
“JDW should open just 10 pubs and sell up to 20 others this year, but it is making sector-leading, at £140k/pub, investment in repairs and maintenance, to the benefit of LFL sales. JDW’s asset quality is improving, as a result of investment, tail-end disposals and freehold reversions (freeholds now account for almost 60% of the estate). This, combined with recent growth in machine and accommodation sales as well as higher drink prices should support margins. Nevertheless, with the shares valued at 9.4x EV/EBITDA, our recommendation remains Hold.”