Leading sector analyst Geof Collyer has issued a Hold recommendation for JD Wetherspoon ahead of its interim results on Friday, saying he doesn’t expect an upbeat outlook for the managed operator.
Collyer, of Deutsche Bank, said: “The key dynamic behind the expected double-digit revenue growth and flat EBITDA is the margin pressure from a number of areas highlighted consistently by management over the past year, which were exacerbated by the Q2 stage when margin expectations came back by a further 50 bps.
“Some may see JDW’s rating (10.8x EV/EBITA) and poor performance relative to the pub peer group (lagging the others by some 25% to 40% since Jan 2012) as cause for potential catch-up from here. However, the stock is lagging its peer group because of margin concerns that mean that the group is having to run very fast just to stand still.
“Our full year PBT forecast of £71.7m is broadly in line with the market. We do not expect consensus forecasts to move much at the H1 stage, and with H2 lfls growth up against tougher comps, the shares are unlikely to pick up on Friday unless there is better news to come on the margin outlook.”
He added: “Since spring 2012, the group has been driving more aggressive lfls growth as a way of offsetting the variety of pressures that have hit the business (and the peer group).
“Tough comps are lying ahead and we do not expect the current trend to continue into H2. Margins are now the lowest they have been since IPO, and JDW has been having more difficulties in offsetting input cost inflation than the peer group.
“We see some mitigation: (i) its utilities negotiating cycle is a year ahead of the peer group; (ii) it is getting hit harder from machine duty changes as its income from this area is higher on average than other pub estates; (iii) it has given the impression of absorbing price increases to protect market share, though we suspect it has been losing volume as well. This year’s rollout is going to be back-end loaded with only 5 of the expected 25 new pubs opening in H1.”
