Leading analyst Douglas Jack, of Numis, has cut pre-tax profit forecasts for JD Wetherspoon after it announced a further 8% increase to staff starting pay.
Jack said PBT forecasts would be cut 6% for 2016E and 2017E, bringing total 2016E downgrades since 1 January to 14%.
He said Q4 like-for-like sales growth had been on the back of slightly easier comparatives and increased promotional activity, particularly around breakfasts/coffee. He said: “ We continue to question whether the resultant volume growth from discount-driven coffee and breakfast campaigns will be sufficient to offset the inevitable hit on margins.”
He added: “EBIT margins fell 130bps (to 7.0%) in Q4 with low price increases (1% on drink) having hurt margins more than they benefited volumes. The combination of slower LFL sales, limited drinks price inflation, rising labour costs (including a 5% increase in pay for hourly paid staff in October) is undermining margins.
“Since 1 January 2015 we have cut our 2015E forecast by 8% (PBT £77.9m; consensus £78.2m). As feared, we are now downgrading our 2016E forecasts by 6% (PBT from £85.2m to £80.5m; consensus £85.7m) to assume EBIT margins fall by 25bps (to 7.15%). This reflects a proposed 8% increase in starting-pay, against a backdrop of “heightened competition from supermarkets and restaurant groups, and increased staff, repairs, bar and food costs.”
“JDW opened 26 pubs and sold six pubs during the first 50 weeks, and should achieve the previous guidance of 30 openings by year-end. With freeholds accounting for a rising share of new sites, we estimate net debt/EBITDA reaching 3.6x in 2015E, and continuing to rise in 2016E and 2017E.
“JD Wetherspoon expects: PBT to fall in 2015E; and “a trading performance similar to, or slightly above, the current year” in 2016E. Our target price equates to 8.2x EV/EBITDA (historical average rating: 7.5x). This assumes that the planned disposal of 20 pubs causes limited dilution and provides some support to margins and EBIT/pub, which fell by 5% in H1.”
