Leading sector analyst Geof Collyer has issued a Hold recommendation for JD Wetherspoon, saying that investors should demand more “proof of stability” in the company, although he did raise his Target Price for the firm after a “better than expected” Q4 interim management statement.
Operating margin was 9.5% in the 11 weeks to 14 July (including some one-off benefits) against 8.7% in the year-to-date (50 weeks to 14 July). Like-for-like sales grew 3.5% in the 11 weeks.
In a note entitled “To Stability and Beyond?”, Collyer, of Deutsche Bank, said Wetherspoons had “better than expected” results but continued: “The market seemed to react as though the volatility for which JDW is famous had come to an end (shares +15%).
“Whilst this is the third year in a row that lfl sales have improved their growth rates, it is the first for six years that lfl profits look likely to grow. The performance remains too volatile to feel that a corner has at last been successfully turned. Investors should demand more proof of stability before taking the shares on any further.”
He added: “After changing our forecast 14 times over the past three years, we have decided to take the management guidance for FY’13 sales and margin growth rates and apply this to our next three years’ forecasts.
“We have also upgraded the EV/EBITA multiple from 10.5x to 11.5x for FY’14E - our base year driving our price target - now that we are forecasting a return to modest lfl profits growth from a near decade of declines. As a result of our forecast increase (see table below) and the higher valuation base multiple, we have raised our target price from 520p to 660p. Our target price is underpinned by our DCF valuation (650p).”
Collyer said: Small changes to the top-line outlook can have a material impact on profitability; we calculate a 1% change to our revenue assumptions would impact pre-tax profits by around 6-8%. As such, the key risk to both the downside and upside is how trading evolves in relation to the UK consumer.”
