J D Wetherspoon plc (JDW) Ordinary 2p
HL comment (7 July 2021)
As of 4 July, 850 Wetherspoon pubs were open, out of a total of 860, with most of the remaining closed pubs in airports. Like-for-like sales were down by varying amounts since pubs reopened, compared with 2019.
Wetherspoon expects to make a loss for the year ending 25 July 2021. Full year results will be announced on 1 October 2021.
The shares fell 2.1% following the announcement.
JD Wetherspoon, or Spoons to most of us, sells cheap pints and pub food across the country. The group is currently operating out of 850 pubs and in normal times generates 96% of its revenue through bar and food sales.
In our expert and thoroughly researched view, pints are too expensive, especially in some of the major cities. Cheap and cheerful pub fare is therefore an attractive offering, even if the Spoons atmosphere isn't to everyone's taste.
A focus on providing good value means Spoons' margins were below competitors' in normal times. Before the pandemic, the group's operating profit margin was just 7.3% before exceptional items, which was behind many peers. Low margins aren't necessarily a bad thing, and many successful businesses have followed a "pile em' high, sell em' cheap" approach. Nonetheless, it does mean Spoons rides slightly closer to the edge than some of its competitors.
The group turned to investors to shore up the balance sheet following the disruption caused by Covid-19 and, after raising the extra cash, net debt stands at £865m. Management intends to keep this at around 3.5 times cash profits for the foreseeable future, but recognises that 0-2 times is probably optimal long term. We understand that interest rates are low at the moment, so the interest costs of a high debt load are lower than they might have been historically. But still, we'd like to see debt come down.
It's worth noting that almost two thirds of Spoons' pubs are freeholds, giving the group a substantial property portfolio. The balance sheet lists £1.1bn in freehold and long leasehold property - and it hasn't been revalued in some time.
Lastly, Spoons' chairman, Tim Martin, is a polarising character thanks to his support for Brexit and colourful updates for shareholders. This wouldn't matter much, except that JD Wetherspoon also doesn't conform with some elements of the UK Corporate Governance Code. The group has explained that it doesn't agree with the guidance on the length of board member tenure, board member independence, or the relative importance of shareholder engagement.
Ultimately, investors will have to make up their own minds on this issue. A degree of non-conformism often looks like genius when things are going well, but if things go badly it's never a good look - especially if there's some sort of governance failure. For us it's not a deal breaker, but it does warrant extra scrutiny.
We think Spoons is in a strong position, and the extensive property portfolio is an attractive bonus. We'd like to see debt come down, but if everything goes to plan this summer, the group should be able to work on that. Spoons shares currently change hands for 4.7 times book value, which is well above the long-term average. The group is not currently paying a dividend.
JD Wetherspoon key facts
- Forward Price/Earnings ratio: 32.7
- 10 year average Forward Price/Earnings ratio: 18.6
- Prospective dividend yield (next 12 months): 0.8%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Wetherspoons had about 500 pubs open for outside trading between 12 April and 16 May, and like-for-like bar and food sales were down 49.0%. Between 17 May and 4 July, when pubs were fully open, like-for-like sales were down 14.6%. Prior to the Euros, like-for-like sales were down 8.1%, but since the tournament started sales were down 20.8% as Wetherspoon is generally not showing the games.
Two new pubs opened in the last six months, and there are 75 new projects -of which 18 are new pubs and 57 are extensions or upgrades - in the pipeline.
Net debt currently stood at £865m on 4 July and is expected to fall to £833m by the end of the group's financial year. Wetherspoon has renegotiated its agreements with lenders, and currently has a minimum liquidity threshold of £75m. Liquidity currently stands at £224m.
The group also complained at length about VAT and alleged media misrepresentations.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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