A leading analyst has said that although the end of the beer excise duty escalator is a big positive for JD Wetherspoon, he expects the company’s pre-tax profit to fall and debt to rise this year. With the group’s Q3’s IMS due on Wednesday 8 May, Douglas Jack at Numis, said: “There should be a few key elements to this update: LFL sales; margins; expansion; cash flow/debt; and taxation. The news flow on tax has improved, but not even a 10% increase in total sales could prevent PBT from falling and debt from rising in H1. We fear any upside risk from higher sales is matched by downside risk to margins. “ The group’s LFL sales rose 6.9% H1. However, Jack said that the benefit of this LFL sales growth and a 3.5% increase in the size of the estate was more than offset by a 102bps decline in margins (due to more promotional activity and higher tax, utilities, labour, food and drink costs), resulting in PBT falling 3%. He said: “JDW continues to struggle to pass on its cost increases. In Q3, we expect LFL sales to slow slightly (despite being up 7.3% in the first six weeks) and then slow further in Q4 due to tougher comparatives (which are: 2.1% in H1; 2.0% in Q3; and 6.1% in Q4). Our full year forecast assumes LFL sales rise 6%, implying a H2 assumption of 5% LFL sales. “Although there is slight upside to our LFL sales assumption, we believe this is fully offset by downside risk to margin forecasts. Our full year forecast of a 76bps decline in margins anticipates margins improving to being down 54bps in H2.” Jack also said that the margin target should be challenging: against tougher LFL sales comparatives; “accommodating the introduction of Gaming Machine Duty (costing £2m pa extra; from February); and starting pension enrolment (costing up to £3.0m pa extra; from February)”. The group opened only five outlets during H1 versus a full year target of 30. Jack said: “The combination of 60% of this year’s new sites being freeholds and neutral working capital should result in net debt increasing (we forecast by £26m, to £489m), resulting in net debt/EBITDA remaining pegged at 3.0x. “Overall, we expect to hold our full year forecasts (which are in line with consensus). JDW’s 7.7x EV/EBITDA valuation is above its 10-year historic average of 7.3x.”