A leading analyst has said JD Wetherspoon has a good opportunity to hold or increase its margins.
Ahead of the company’s full-year results on Friday (9 September), Douglas Jack at Numis said: “Between 2007-12, total sales rose 35% (£308m) to £1.197bn, yet profit after tax fell over this period largely due to higher taxation/regulation eroding margins.
“With the beer duty escalator now stopped and machine income (which generates over a third of PBT) due to receive a stakes & prizes boost, there is now a good opportunity for the company to hold/increase margins (each 10bps change = a 1.7% change in profit before tax).”
Jack issued an Add recommendation for Wetherspoons at a 750p Target Price. He said: “For Friday’s final results, we forecast PBT to be up 6% to £76.5m (consensus £75.3m). There should be limited room for surprise as the company has already reported a 7.4% increase in total sales and an 8.7% EBIT margin for the first 50 weeks. Trading is likely to have slowed in recent weeks due to tough comps, but we believe 2014E forecast assumptions are sufficiently cautious.
“In weeks 40-50, LFL sales rose 3.5%, resulting in LFL sales being up 6.0% over the first 50 weeks. This Q4 slowdown was expected due to a tougher comp of 6.1% (vs. 2.0% for Q1-3). LFL sales are likely to have slowed further in the first six weeks of 2014E due to an 8.4% comp (JDW performed well during the Olympic and Paralympic Games) and limited weather-sensitivity.
“EBIT margins were 9.5% in Q4, including some one-off benefits, and were at 8.7% for the first 50 weeks (vs. 9.0% in 2012). As a result, forecasts were upgraded 4-5% in July. With ongoing cost inflation running at 3%, 2-3% LFL sales should be required in 2014E to offset higher costs. This is what management expects, hence it has guided to margins being flat, at 8.6% in 2014E.
“Our consensus-in-line 2014E forecast assumes LFL sales rise by only 1.5% and margins fall 25bps, both below management guidance. We believe there is upside to our and consensus forecasts as margins should benefit from a boost to machine income (70% margin; accounting for c.27% of EBIT) after maximum prizes rise to £100, from £70, in November.
“JDW opened 29 pubs in 2013E and has increased 2014E guidance to 30 new sites (up from 25). The company was pleased with 2013E’s openings and expects a more evenly-weighted opening programme in 2014E (2013E’s was Q4-weighted).”
