A leading analyst has raised his earnings forecast and increased his target price for JD Wetherspoon on the back of the group’s confidence regarding its ability to maintain its margin levels.
Jamie Rollo at Morgan Stanley said: “Wetherspoon announced a positive trading update, with LfL sales growth of 6% for the full year, and EBIT margins improving. This leads us to raise our F13 EPS forecast by 2%, and our later year forecasts by 5-8%. We increase our price target by c.20% to 710p to reflect the forecast upgrades, rolling forward a year, and higher peer group multiples.
“The company sounds confident that 8.7% is a sustainable margin level, and the confidence in the margin leads us to increase our later year forecasts a little.”
Year to date total sales growth is 9.2%, and the margin is 8.7%.
Rollo said: “We now incorporate total sales growth of 7.4% (equivalent to 9.2% after adjusting for last year’s 53-rd week) and an EBIT margin of 8.7%. This drives our new EBIT forecast of £111m, up slightly from our prior forecast of £110m.
“The company sounds confident that 8.7% is a sustainable margin level, and the confidence in the margin leads us to increase our later year forecasts a little. The shares are trading on a F14 estimated P/E of 14.2x, which is towards the middle of the long-term range. F15 will benefit from a significant reduction in interest cost as swaps mature, such that we expect EPS growth to accelerate from 11% in F14 to 18% in F15. We think the strong growth profile supports a multiple that is higher than the peers at this point.”
