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Thu 28th Aug 2014 - Analyst: JDW set for fifth year of margin erosion
Geof Collyer – JD Wetherspoon set for five years of margin erosion: Deutsche Bank leisure analyst Geof Collyer has forecast “good top line growth again, but margin erosion for the fifth straight year” in Wetherspoon’s (JDW) full-year results due on 12 September. He said: “The shares have been the worst performing amongst the pub and restaurant retail stocks over the past quarter, driven by downgrades at the year-end IMS in July. In our ‘Enigma variations’ note (on 15 Sep 2013) and our sector note (‘The chips are up‛ on 27 April 2014), we suggested that JDW needed to maintain its rollout programme to generate positive momentum, as cost inflation – either input or self-inflicted – was eating up the benefits of like-for-like sales growth. This remains the situation. At the current share price, JDW is trading on an EV/EBITA premium [FY’15E] to its peers (excluding The Restaurant Group, reporting First Half results on 29 August) of between 10% and 20%, yet its three-year Compound Annual Growth Rate earnings growth is lower than all of them. With the margin pressures persisting, we see the shares as fairly valued around this level (745p). After 49 weeks, like-for-like sales were +5.4% and total sales +9.8%. The EBITA margin expectations for FY’14E & FY’15E were downgraded again to 8.1% and (in the region of) ‘7.7% to 8.1%’ respectively. Our plan in September 2013 to leave our forecasts unchanged for a year – after 14 changes to forecasts in the previous three years – failed miserably. At this stage last year, we were forecasting Financial Year 2015 profit before tax of £96m. This figure is now higher than our Financial Year 2016 forecast, with Financial Year 2015 profit before tax -11% lower than at the same stage last year; this being the fourth downgrade in 12 months. Growth in Financial Year 15E is being driven by +9% top line growth (+3% like-for-likes, +4.5% average number of pubs trading, +1.5% estate maturity), offset by -21 bps decline in EBITA margin, but enhanced by a 10% drop in net finance as the new swap kicks in. Earnings Per Share growth of +13% is also aided by Financial Year 2014’s £21m share buyback programme (funded by borrowings).”

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