JP Morgan on JD Wetherspoon

JD Wetherspoon’s (JDW) profit outlook does not justify its current multiple, according to the latest analysts note on the operator from JP Morgan.

“Despite relatively sanguine commentary from management on costs, we remain concerned that adj. PBT may fail to meet consensus in FY20E,” said the note. “Moreover, even if consensus expectations were delivered we view the valuation as stretched.”

JDW reported a like-for-like sales (lfls) increase, before exceptional items, of 6.8% for the full year to 28 July 2019. Revenue was up 7.4% over the period, from £1.69bn in 2018 to £1.81bn this year, but profit before tax was down 4.5% to £105.5m. Like-for-like sales for the six weeks to 8 September 2019 were up 5.9%.

It said the management comments suggested that the consensus of £104m was a “reasonable expectation for FY20E (pre-IFRS 16). “Post IFRS 16 £104m would equate to about £90m,” it said. On 29 July 2019, JDW adopted the IFRS 16 leases standard.

“Management highlighted that they internally work towards an absolute profit number for the full year, rather than an operating margin. They also confirmed that their “expectation” for FY20 includes no property gains,” noted JP Morgan.

“£104m of pre-IFRS 16 adj. PBT would imply ~5% underlying operating profit growth and a ~7.3% (pre-IFRS 16) margin in FY20E, which we think will be challenging to achieve after no profit growth in FY19 despite almost +7% LFLs (FY 19 margin 7.3%, -50bps y/y).”

Commenting on the expectation that JDW management sees wage inflation at c.2% above inflation, JP Morgan said it believed that would be a relatively favourable outcome. “They note that the previous round of increases included an equalization of the pay of 18-21-year-old employees with those 21+, and this element will be non-recurring,” said the note.

“Food and drink inflation this year was said to be slightly below inflation and a similar outcome is expected in FY20E,” it added.

“IFRS 16 has a material impact on reported numbers. Aside from the expected large increase to EBITDA, adj. PBT/adj. PAT would have been reduced by £14m/£12m, or 14%/15%, under IFRS 16 in FY19. This effect mechanically increases the PER, on top of the well understood reductive impact on EV/EBITDA. JDW now trades on a JPMe FY20E PER of 24.3x, which is ~20.7x expressed pre-IFRS 16.

“We now incorporate IFRS 16, adjusting our numbers to align with the impact detailed by JDW. We increase our pre-IFRS 16 adj. PBT estimates for FY20E/21E slightly from £98m/£101m to £100m/£103m. Our post-IFRS 16 FY20E/21E adj. PBT is £86m/£89m,” read the note.