Analysts have given a positive response to JD Wetherspoon’s results yesterday, describing them as better than expected.
The managed operator reported a 3.5% rise in like-for-like sales in the 11 weeks to 14 July, with margins in growth.
Douglas Jack at Numis said: “Today’s Q4 IMS is better than expected. Although like-for-like sales slowed to 6.0% (in line) after 50 weeks (from 6.7%) due to tougher comparatives in Q4 and price increases towards the end of Q3, margins have improved to 8.7% (from 8.4%). We upgraded our 2013E PBT forecasts by £4m in early July expecting margins to be ahead; today, with margins further ahead, we are upgrading 2013E by a further £2.5m (3.5%) and future years by an average of 3%.”
He added: “In Q4 so far (weeks 40-50), LFL sales are up 3.5%, resulting in LFL sales being up 6.0% year-to-date (in line with our FY forecast). This slowdown was expected due to a tougher Q4 comparative of 6.1% (vs 2.0% for Q1-3). Recent trading is benefiting from initiatives such as hosting bigger drink festivals and improved menus, but with limited benefit from the good weather.
“EBIT margins were 9.5% in Q4, including some one-off benefits and were at 8.7% for the first 50 weeks. Margins are 35 bps above consensus, equivalent to £4.5m of PBT, and 20bps above our forecast. As a result, we are raising our 2013E PBT forecasts (from £73.9m to £76.5m; consensus £71.9m).
“8.7% EBIT margins are viewed as an indicator of future margins, despite expected increases in excise duty (c.£2.5m), business rates (c.£2m), machine gaming duty (c.£2m) and pension contributions (c.£1.5m) in 2014E. Offsetting these factors, maximum machine prizes will rise to £100 from £70 from November; and cost inflation is slowing slightly (food costs up 3-5%; and utility costs up 6%). As always, much will depend on LFL sales and prices (which were up 4% in the year to March 2013).
“Between 2007-12, total sales rose 35% (£308m) to £1.197bn, yet PAT 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 PBT).”
Nick Batram at Peel Hunt issued a Hold recommendation and said: “Although a number of one-off factors boosted the Q4 margin, the underlying trend was still better than expected. It looks as though H1 was the nadir as far as margin was concerned and, if we can get more confident that the picture has stabilised, then we see room to take a more positive stance.”
James Hollins Investec said: “Wetherspoon has reported better than expected Q4 2013A LFL revenue growth and margin. This has resulted in a 4% upgrade to our FY13E EPS, while the increased pub opening programme derives from, we believe, greater confidence in future trading and a strong pipeline of new sites.
“On increased forecasts (FY14E EPS +2%) and a FY rollover of our DCF-based PT methodology, our PT rises from 660p to 750p. With a forecast 9-10% FCF yield (FY14-15E) and strong ongoing trading, we retain our Buy.”
He added: “We applaud the group’s ability to drive both better than expected top-line and margin growth during Q4, with a positive stance being taken on pub roll-out and the margin outlook, despite the impending cost impact from higher duties and business rates.”
