A leading analyst has said that ahead of JD Wetherspoon announcing it first half results on 15 March, severe pressure on the group’s profit margins mean its shares look fully valued.
Jamie Rollo at Morgan Stanley said: “The company has already given revenue growth and operating margins for the half so there will not be any surprises in the headline figures. Our focus will be on the dividend, current trading and news on estate expansion. Despite 11% sales growth in H1 (well ahead of our and consensus forecasts), it looks like EBIT will be down and the increasing margin decline is a concern, so we will look for any update on the strategy here.
“For H1, we expect £52m of EBIT (-2%), PBT of £34m (-6%) and EPS of 20.1p (-1%). For the full year our forecasts are for £105m EBIT (-2%), PBT of £69m (-5%) and EPS of 41.0p (-1%), leaving us broadly in line with consensus of £107m, £70m and 41.3p respectively. Due to the 53-week year in 2012, there is a c.4% headwind in H2 2013 from returning to 26 weeks in H2, and we see downside risks to consensus forecasts, particularly if LfL growth slows sharply. “
Rollo said he considered JD Wetherspoon to be a long-term winner in the industry, however he sees headwinds rising further in 2013 with pressure on consumer spending and ongoing cost inflation.
He said: “With high operational gearing and ongoing pressure on margins, we see little to drive the shares in the near term. We expect like for like sales growth to slow later in the year. Like for like sales in the second quarter were +8%, the fastest growth in around 10 years, and well ahead of our +3% forecast.
“This was boosted by strong festive trading and is likely to have slowed sharply due to the snow, in line with other pub operators (Marstons -12% week to 19 January) and we will look for an update on current trading.
“Looking into H2, we expect growth to slow to around 4.5% as the company faces tougher comps from the Diamond Jubilee, Euro 2012, the Olympics and an extra week in H2 2012. We estimate that every 1% LfL sales is worth 6% to EPS.”
Rollo said he saw downside risks to his forecasts for broadly stable margins going forward.
He said: “The company said in its Q2 sales update that it expects an H1 operating margin of 8.2%, implying an all-time low of 7.8% in Q2, c.(150)bps relative to last year. This disappointing margin decline more than offsets the benefit of the strong sales growth, leading to group EBIT being slightly lower year-on-year in H1, we expect.
“The company attributed this to increases in costs such as tax, utilities, labour and supplies, but it also highlighted increasing marketing costs, suggesting it may be buying some of the strong top-line growth. We assume a slight improvement from Q2’s margin in H2, and forecast 8.2% for the full year.”
The analyst said that he will look for a further update on input cost inflation and any plans to offset these, as well as any comment from management on pricing and marketing.
He said: “We estimate that every 50bps to EBIT margins is worth 9% to EPS. 25 new units planned for the year. Wetherspoon had opened five new pubs at the time of the Q2 IMS, and maintained the target for 25 new openings within the year. We will look for any update here, noting that every 10 new pubs is worth 1.5% to EPS.
“We forecast a 4.0p (flat) dividend in H1 and 12.0p for the full year, in line with last year, and will look for any update here. JDW is a highly cash generative company, having grown EPS at a compound rate of 17% in the 20 years since listing but FCF per share by 19%, and for the full year we expect 55.5p FCF per share. We will look for any update on cash generation at the interims.”
