As JD Wetherspoon toasts progress, have its shares bottomed out?

It’s always worth reviewing full-year figures for JD Wetherspoon (JDW) if for no other reason than to be privy to the musings of group chairman Tim Martin. In a relatively subdued review of the year to 30 July, he again cast doubt on the efficacy of the lockdowns, while pouring scorn on the media’s coverage of the pubco, declaring that “in the febrile atmosphere of the first lockdown, something went awry and a number of harmful inaccuracies were published”.

Fleet Street aside, nothing appears to have gone particularly awry from a trading angle, yet the market didn’t react favourably to the full-year update, at least judging by the share price performance on results day. Nonetheless, trading has edged in front of the pre-pandemic comparators, with like-for-like sales up by 7.4 per cent and the growth in food outstripping wet sales. The positive trading performance was also reflected in free cash flow generation of £102mn once the impact of the sale of interest rate swaps is discounted. The outcome would have been even more impressive save for outflows linked to capital investments and share purchases for employees.

Trading and cash flows provide cause for encouragement, but the health of the balance sheet became the key consideration once the government pulled the rug from underneath the licensed trade. Happily, Wetherspoon has made notable progress on this score. Debt levels, leaving aside lease liabilities, have decreased by £163mn since January 2020 to £642mn. And it could be argued that the pandemic may have acted as a catalyst to clear the decks of underperforming assets. Indeed, the group continues to rationalise its estate, selling 13 pubs in the period under review, closing another four, while terminating the leases at 14 sites.

True to form, Martin did point to what he considers unfair and inflexible rules governing valuations for the estate, specifically the fact that existing regulations do not take account of expected future cash flows which would “result in a valuation which is considerably in excess of book value”. The chairman cites “one pub in south London” which has an estimated return on equity of £4.4mn since it opened 20 years ago, “yet its valuation has been impaired due to low profitability in the aftermath of the pandemic”.

Martin also took aim at the business rates regime in Scotland, but in the main – with post period-end sales also 9.9 per cent to the good on the 2022 comparator – he should be satisfied. We think that the share price has bottomed out, a conclusion supported by a technical signal in March 2023. With the shares trading at 17 times consensus earnings, we return to hold. Hold.

Last IC View: Sell, 640p, 24 Mar 2023