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Morning Briefing for pub, restaurant and food wervice operators

Wed 20th Jan 2016 - JD Wetherspoon reports like-for-likes rise to 3.3%
JD Wetherspoon reports like-for-likes rise to 3.3%: JD Wetherspoon has reported like-for-like sales growth rose to 3.3% in the first 12 weeks of its second quarter to 17 January 2016, with total sales up by 6.3% in the period. In the year to date (25 weeks to 17 January 2016), like-for-like sales increased by 2.8% and total sales increased by 6.1%. The company stated: “We expect the operating margin (before any exceptional items) for the half year ending 24 January 2016 to be around 6.3%, 1.1% lower than the same period last year. The margin reflects the increases in the starting rates for hourly paid staff in October 2014 and August 2015, which totalled approximately 13%. The company has opened five new pubs since the start of the financial year and has sold two. We intend to open 10 to 15 pubs in the current financial year. The company remains in a sound financial position. Net debt at the end of this financial year is currently expected to be slightly above the 26 July 2015 total of £601.1 million.” Chairman of JD Wetherspoon, Tim Martin, said: “Like-for-like sales have improved in the second quarter so far. However, as indicated in our November trading update, increased labour costs will be an important factor in the outcome for this financial year. Our current view is profits for this year are likely to be towards the lower end of analysts’ expectations.” Cenkos Securities leisure analyst Simon French stated: “JD Wetherspoon has reported its usual mixed trading performance with 3.3% like-for-like sales growth for the 12 weeks to 17 January but a circa 70bps decline in the Ebit margin. Overall FY profits are likely to be towards the lower end of analysts expectations (range £68.9-89.3m PBT; consensus £75.8m, Cenkos £75.9m). We estimate H1 profit will be down over 14% to c£32m PBT reflecting like-for-like sales of 2.8%, total sales of 6.1% and an operating margin of 6.3% (down 110bps YOY). In a stock market increasingly concerned by debt levels, Wetherspoon’s stands out as having the highest adjusted net debt/Ebitdar in the managed pub and restaurant sector at 4.8x. The group has again cut guidance on pub openings for this year now targeting ten-15 (previously 15). Pre downgrades the stock trades on a CY 2016E adjusted EV/Ebitdar of 7.3x (P/E 14.1x) and yields just 1.8%, ‘Sell’.”

Geof Collyer – 2015 the worst year since 2009 for forecast downgrades: Deutsche Bank leisure analyst Geof Collyer has argued that 2015 was the worst year since 2009 for forecast downgrades among the major companies. He stated: “Slowing like-for-likes, possibly caused by higher space growth than at any stage since records began in 2009, resulted in something of a retrenchment in terms of new site rollout for most groups. This was compounded by a difficult margin outlook, driven by the introduction of the National Living Wage, which led to 2015 being the worst year for forecast downgrades since 2009. With much of this backdrop carrying over into 2016, investors should adopt a more stock specific approach this year. The hope is that a seemingly buoyant Festive trading period heralds a better outlook. At this point, we are not sure. Top picks – Greene King stands out due to self-help factors and geography: Greene King (‘Buy’): [i] We raised our forecasts on the H1-16 results statement in December on an underlying basis, excluding any accounting adjustments – the only upward revision in the subsector. [ii] Whilst the Spirit deal expands the group’s geographic footprint, it also consolidates GNK’s strong position in London and south east (we estimate profits to be more than 35% of group from this region), where spend on eating and drinking out is 20% higher than the Rest of GB. This should also lead to better like-for-likes vs. the peer group. [iii] Enhanced cost savings plus future revenue synergies from Spirit should underpin growth for GNK for the next three to five years, thereby further extending its outperformance vs. the rest of the sector. The Restaurant Group (‘Buy’): despite last week’s downgrade on a disappointing end to 2015, we remain buyers of RTN, as we believe that its steady growth, consistently superior operating performance, rollout story, conservative balance sheet and high return on capital (computed either by grossing up off- balance-sheet debt or ignoring it) justify the upside to our revised price target. Enterprise Inns (‘Buy’): remains something of a special situation, with significant upside potential if it can deliver on the radical new five-year retail and property strategy. The Capital Markets Day in March should shed some interesting light on progress. Since November 2014, we have downgraded FY16 earnings forecasts for the six major pub and restaurant stocks by between -4% and -20% (see Figure 34); GNK and Marston’s (‘Hold’) by -4%, with ETI -10%, JDW -19% and M&B -20%. JD Wetherspoon (‘Hold’): Our forecast downgrades for FY16, FY17 and FY18 in this note is more of a delayed update from the Q1-16 IMS. From here, we would expect some stability, though that is a phrase used with a degree of caution as far as JDW is concerned. Mitchells & Butlers (upgrade to ‘Buy’): As a result of the market’s reaction to the poor operational performance and NLW impact, M&B’s share price has now fallen to around the level it was at before the previous CEO arrived (280p in Sept-12). On half the P/E multiple of direct peers JDW and RTN, there is a lot of negativity already factored into the rating and nothing for the new CEO getting anything right. We have upgraded to ‘Buy’.”

NewRiver Retail completes first convenience store development from pub estate: Property company NewRiver Retail has completed and handed over its first convenience store development from within its pub estate to the Co-operative Group, which opened for trade in January 2016 following ‘an efficient five-month end-to-end delivery period’. The company stated: “The annual rent for the first pub is £73,000 per annum on a 15-year lease across 4,173 square foot. The company is on-site for the construction of a further three. During the period NewRiver secured a further two convenience store planning approvals, equating to a total of 24 secured to date. Value-creating residential development continues to progress well within the pub portfolio with the submission of a further 12 residential planning applications during the quarter, consisting of 45 units, for which three consents have been granted across three sites for a total of seven houses. The company intends to submit in excess of 20 additional applications in Q4, providing 70 houses in a combination of one and two bedroom apartments, as well as detached and semi-detached houses. The pub portfolio continues to perform well, meeting financial and revenue expectations.” It has hired Jackie Moody-McNamara as pub portfolio director. The company added: “Mrs Moody-McNamara will lead the strategy on NewRiver’s £150 million portfolio of 359 pubs, in addition to overseeing relations with the pub tenants supporting them through proposed developments. Mrs Moody-McNamara also works closely with LT Pub Management to ensure the portfolio continues to trade well. This appointment is in line with the company’s commitment to increasing the profitability of the pub portfolio and its income. Mrs Moody-McNamara brings over 20 years’ experience in the pub sector, having held senior roles at Punch Taverns and Allied Breweries. Mrs Moody-McNamara’s last role at Punch was Programme Director where she had responsibility for driving a series of strategic projects across the business.”

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