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JD Wetherspoon growing out of trouble

A rise in the pub group’s top line helped the operating margin to inch upwards, despite higher estate servicing costs
September 18, 2017

Shares in JD Wetherspoon (JDW) climbed more than a tenth on a strong set of full-year results. The pub group reported an 80 basis point improvement in the operating margin to 7.7 per cent, double-digit pre-tax profit growth (see table) and higher free cash flow. Food sales helped to boost the top line, partly driven by the popularity of the company’s breakfast offering. 

IC TIP: Hold at 1,181p

During a press conference at a Wetherspoon branch in the City – an exercise in ‘public house relations’, one might venture – chairman Tim Martin also commented (as usual) on the ongoing Brexit negotiations. Interestingly, Lavazza coffee, an Italian brand, is the company’s highest-selling item. Mr Martin argued again that economic pain would weigh more heavily on EU suppliers, as the UK pub chain could easily switch products.

Margins were in the high teens in 1997, and Mr Martin says this level won’t be revisited. Even so, these figures suggested momentum has been regained. Like-for-like sales were up 4 per cent, utility and interest costs were lower, while disposals of some lower-margin pubs also helped. In total, 10 pubs opened and 41 closed, leaving 895 trading pubs at the year-end. Like-for-like sales have increased by 6.1 per cent since the year-end; but this strong start is “very unlikely" to be maintained because of tougher comparatives and end of the school holidays.

The company paid £695m in taxation during the year, up £22m. Mr Martin argues that pubs pay excessive tax on food sales compared with supermarkets, meaning supermarkets can sell cheaper alcohol, adding that the government could achieve higher tax revenue and employment by equalising tax. As it was, the tax take was lower than expected, helping EPS beat analyst expectations.

Meanwhile, the ratio of net debt to cash profit fell slightly year on year to 3.4 times. Higher debt stemmed from a combination of expenditure on new pubs, extensions, freehold reversions, dividend payments and the buyback of 4 per cent of Wetherspoon’s issued share capital.

Analysts at Peel Hunt forecast adjusted pre-tax profit of £98.8m and EPS of 67.4p for the year to July 2018, down from £100m and 69.2p in FY2017. They say FY2018 “will be very different” as beer duty rises, in addition to the new sugar tax.

JD WETHERSPOON (JDW)  
ORD PRICE:1,181pMARKET VALUE:£1.25bn
TOUCH:1,179-1,183p12-MONTH HIGH:1,183pLOW: 810p
DIVIDEND YIELD:1%PE RATIO:23
NET ASSET VALUE:217pNET DEBT:£696m
Year to 30 JulTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20131.2857.137.812.0
20141.4178.433.912.0
20151.5158.737.912.0
20161.6066.044.512.0
20171.6676.451.512.0
% change+4+16+16-
Ex-div:26 Oct   
Payment:30 Nov