Leading analyst Douglas Jack has forecast that JD Wetherspoon will report a 6% rise in pre-tax profit to £37m, with earnings up 9%, at its interim results next Friday (14 March).
Jack, of Numis, said: “After 25 weeks, like-for-like sales were up 5.2% and margins had fallen c20bps partly due to increased repairs, IT and training costs as well as additional operating personnel, ahead of a step-up in expansion. Our Add recommendation reflects earnings growth and assumes no further re-rating.”
“Our 2014E forecast (PBT: £77.4m; consensus £78.5m) assumes full year like-for-like sales rise 4% and margins fall to 8.2%. The shares have re-rated to 17x P/E (historic average: 14.6x). Our 12-month price target of 925p, equivalent to 16x P/E on 2015E’s earnings, reflects faster expansion and lower swap costs.
“After these results, the next catalyst should be the National Budget announcement; we would expect JDW to be the greatest beneficiary if there is another cut in beer duty.”
Jack said he expects like-for-like sales to still be ahead of his 4% full year assumption, even though like-for-like comparatives remain tough in Q3 (+6.3%), before easing in Q4 (+3.1%).
“H1 EBIT margins fell 20bps to 8.1% in H1 (8.3% in Q1; 7.9% in Q2), with guidance set at c8.3% in H2. Net cost inflation is running at 3%, but investment in repairs and labour has increased ahead of a step up in expansion, hence full year margin guidance (8.1-8.3%) is c.50bps down on last year (8.7%). Management focus remains on sales, cash profits and earnings, rather than margins.”
Jack said the introduction of free coffee refills and extended food trading hours in Q2 “has added to the short-term drag on margins through higher labour costs”. “Management told us in January that if the National Minimum Wage rises by ‘inflation and a bit’ (which it will), the additional cost can be absorbed.”
He added: “Eighteen new pubs opened in H1, with 40-50 expected to open over the full year. Of these, 65% of sites should be freehold (vs a 44% company average). As a consequence of this, faster expansion and a negative working capital movement, net debt should increase by c£70m this year. Despite this, interest costs should fall from next year due to maturing swaps (2015E benefit: £5m).”