BULL POINTS:
■ Low cost offering proving resilient
■ Delivering sales growth
■ Dividend reinstated
■ Shares cheap for the sector
BEAR POINTS:
■ Cost burden could grow
■ Debt remains high
IC Risk rating
Tip style: Speculative
Risk rating: Medium
Timescale: Long-term
The UK's economy is barely out of its recession - it grew just 0.3 per cent in 2009's fourth quarter - and it may even drop back in. Against that backdrop, if you're going to be brave enough to put money into a pubs operator's shares it makes sense to opt for the one offering the cheapest beer and the best-value food.
Almost certainly, that plaudit goes to JD Wetherspoon, which has always had an impressively competitive offering. It was only in January 2009, for example, that Wetherspoon snatched headlines by serving up the 99p pint - a price last seen in pubs in the late 1980s - as well as meals for £3 per head.
The success of that pricing plan was on display this month with the group's first-half figures. The tough winter was bad news for most pubs operators, but Wetherspoon's like-for-like sales were resilient, growing by 0.1 per cent in the half-year to 24 January. Add in pubs opened during the period and sales grew 4.1 per cent year-on-year, to £488m. What's more, profits are growing robustly - strip-out exceptional items, mainly related to weak property prices, and adjusted pre-tax profits grew 17.5 per cent in the period to £36.2m. Management also maintained the operating profit margin at a healthy 10 per cent and City analysts expect margins to improve in the second half.
That said, the £441m pile of net debt, which is over 60 per cent of the value of Wetherspoon's equity, is heavy. But even that isn't as grim as it seems. That's because the group's debt is just 2.7 times its cash profits and that ratio is low as pubs operators go; at Enterprise Inns, the ratio is near to eight times.
| ORD PRICE: | 513p | MARKET VALUE: | £714m | |
| TOUCH: | 512-513p | 12-MONTH HIGH/LOW: | 551p | 338p |
| DIVIDEND YIELD: | 2.5% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 131p | NET DEBT: | 242% | |
| Year to 31 July | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | 0.89 | 62.0 | 31.8 | 12.0 |
| 2008 | 0.91 | 54.2 | 25.2 | 12.0 |
| 2009 | 0.96 | 45.0 | 18.2 | nil |
| 2010* | 1.01 | 74.0 | 36.0 | 19.0 |
| 2011* | 1.07 | 79.7 | 39.3 | 12.6 |
| % change | +6 | +8 | +9 | -34 |
Normal market size: 10,000 Matched bargain trading Beta: 0.9 *Numis Securities estimates (Profits and earnings not comparable to prior historic figures) | ||||
What's more, the group's borrowings have been refinanced with a £530m four-year facility. That doesn't expire until March 2014 and replaces the existing £435m facility, which was due to expire in December. The move puts Wetherspoon's funding on a firm footing and, after axing dividends in 2009, the payout has been reinstated. Indeed, with the half-year figures management announced a 19p dividend for 2009-10. True, 7p of that is effectively part of 2010-11's payout brought forward to escape higher tax. Even so, it's not bad given that some of Wetherspoon's rivals aren't paying a dividend at all.
The more secure funding should also leave Wetherspoon better able to support expansion and the group opened a net 15 new pubs in the half-year to end-January, bringing its estate to 746 pubs. What's more, the tough economic backdrop has made it cheaper to open new pubs. Management says that the average development cost for a new pub has fallen to £850,000 from about £1.5m a year or so ago.
But other costs, especially taxes, could go the wrong way. Not only could VAT rise, but beer duty has risen 20 per cent since March 2008 and the government has plans for a further increase this month of 2 per cent above inflation. Certainly, Wetherspoon has benefited from a trend towards trading down in today's tough times, but such hikes could encourage drinkers to buy still more of their beer from supermarkets.
