■ Like-for-like sales are up
■ Profit margins are under pressure
■ Management sounds a cautious note
A big part of that margin pressure reflects a growing tax burden for pub operators – as a result of changes introduced at the last budget. As well as excise duty increases, a change in tax allowances for fruit and slot machine taxation has resulted in an extra £2m a year cost for the group. What's more, the government's so called 'late night levy' will cost the group another £2m a year, too. Altogether, management estimates that the effect of the three tax hikes in the next financial year will be approximately £11m. Such additional cost pressures have led management to be "slightly more cautious about the potential outcome for the current financial year".
Charles Stanley says...
Hold. Encouragingly, the like-for-like sales trend has moved back in line with that seen in the first half – unfortunately, profit margin weakness has now materialised. Furthermore, the margin is unlikely to rebound fully in the fourth quarter, which has adverse implications for 2012's full-year figures. We had already revised down our full-year forecasts at the half-year stage and are now trimming them again to reflect these cost pressures. We had forecast adjusted pre-tax profit of £66.8m for end-July 2012 and have cut that to £66.8m. We retain our hold recommendation.
Numis Securities says...
Hold. Like-for-like sales were slightly better, and margins slightly worse, than our full-year assumptions. But we are holding our forecasts as they are – expect pre-tax profit of £67.2m for end-July 2012, with EPS of 37.4p. The group's outlook statement was cautious, having cited the impact of higher taxation in particular. Potential sources of optimism include an improvement in the cost outlook and an introduction of minimum pricing. Share buybacks should limit the downside, too – although we estimate that only 1m shares can be bought back in the fourth quarter given current debt guidance. Our price target stands at 408p.
SHARE TIP UPDATE
Cost pressures are a worry and Wetherspoon has already cut next year's expansion target to just 25 new sites - potentially bad news for long-term growth prospects. The debt pile - forecast by Numis to stand at £473m by the end of July - looks heavy, too. At 400p, and rated on a not so cheap 11 times forecast earnings, we reiterate our earlier sell advice (412p, 27 October 2011). Sell.
Last IC view: Sell, 405p, 9 March 2012