Leading sector analyst Geof Collyer has upgraded JD Wetherspoon following the managed pub operator’s Q1 interim management statement.
JD Wetherspoon yesterday reported a 7.1% increase in like-for-like sales for the 13 weeks to 28 October. Total sales increased 11.1%, but the 862-strong company warned that it does not expect this level of sales growth to be sustained for the rest of the financial year.
Collyer, of Deutsche Bank, raised his forecasts by c+2% and target price by +8% from 455p to 490p.
“The better than expected lfls growth we think is enough to raise our +2% full year lfls forecast to +3%. We have also raised our forecasts for FY’13 - ’15 by around +2% pa.
“Our valuation for JDW has been based on 10x FY’13E EBITA. We have increased this multiple to 10.5x now that we have JDW returning to at least flat lfl profit growth after a decade of mostly lfl profit declines.
“This means that we have increased our target price to 490p, a level that is backed up by our DCF valuation. Despite the significant reduction in the rollout programme, JDW is likely to be cashflow negative again this year.
"After adjusting for the timing issues on working capital and other, and on a post rollout, pre-dividend basis, we are forecasting cash neutrality for 2013, so there does not seem much scope to grow the dividend this year.
“The shares are high enough for now, but the outlook is improving and we wouldn’t rule out more buybacks.”
He added: “Input cost inflation remains a problem for the industry and JDW in particular, given the relatively low EBITA margins that it operates with. We have maintained our assumption of a 20 bps fall in the EBITA margin this year, although in Q1 more of this has been driven by higher marketing spend as opposed to input cost inflation.
“Only two pubs opened in Q1 implies the rollout programme is likely to be back-end loaded again this year.”
Douglas Jack at Numis issued a Hold recommendation at a target price of 525p.
He said: “LFL sales slowed to 6.0% over the last seven weeks. Q1's 7.1% increase was well ahead of our previous full year forecast assumption of 2.5%. However, margins still fell 40bps, 35bps below our previous forecast, reflecting low price increases.
“Combined, we estimate that Q1 profits are slightly ahead, but we are holding our forecasts due to additional cost pressures and tougher comparatives in H2.
“Based on EV/EBITDA, JDW’s valuation is 5% below its 10-year historic average.
“However, our stance remains Hold: there should also be some upside risk to sales forecasts; offset by further downside risk to margins given that LFL sales should slow and new regulatory costs should emerge in H2.”
