ii view: glass half-full as Wetherspoons shares rally

Shares for this budget pub operator have significantly underperformed the FTSE 250 index. We assess prospects. 

Full-year results to 31 July

• Revenue down 4.3% to £1.74 billion compared to pre-pandemic 2019
• Pre-tax loss of £30.1 million, improved from a loss of £155 million last year
• No dividend payment

Chairman Tim Martin said:

"The company has improved its prospects in a number of ways in recent financial years - we own an increasing percentage of freehold properties; the balance sheet has been strengthened; interest rates have been fixed at low levels until 2031; we have a large contingent of long-serving pub staff and underlying sales are improving.

“However, as a result of the previously reported increases in labour and repair costs and the potentially adverse effects of rises in interest rates and energy costs on the economy, firm predictions are hard to make. Perhaps the biggest threat to the hospitality industry is the possibility of further lockdowns and restrictions.”

ii round-up:

Pub group Wetherspoon (J D) (LSE:JDW) today detailed sales and losses broadly in line with City forecasts, along with a 10.1% improvement in sales for the first nine weeks of its new financial year to 2 October. 

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A pre-tax loss of £30 million for the year to the end of July was better than the previous year’s loss of £155 million, despite higher energy and labour costs. Sales of £1.74 billion were down 4% from the pre-Covid 2019’s £1.82 million. 

Shares for the Watford headquartered company rose by 14% in UK trading having come into this latest announcement down by around a half year-to-date. Shares for FTSE 250 rival Mitchells & Butlers (LSE:MAB) and owner of the All Bar One chain are down by a similar amount during 2022, as is smaller rival Marston's (LSE:MARS). The FTSE 250 index is down by around a quarter year-to-date. 

Wetherspoons flagged improving sales over the course of the financial year, with first half like-for-like sales down 7.4%, third quarter sales down 4%, and fourth quarter sales retreating by just 0.6% compared to the pre-pandemic 2019 year. 

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Improving sales helped free cashflow to a positive inflow of £21.9 million from the prior year’s outflow of £83.3 million, while two equity fund raising issues helped group debt decline to £1.29 billion including leases compared to a pre-pandemic £1.45 billion. 

Broker Morgan Stanley reiterated its ‘equal weight’ stance towards the shares following the results. Next trading update is scheduled for 9 November. 

ii view:

Founded in 1979, Wetherspoons is known for converting unconventional premises into pubs, such as former cinemas and banks. It listed on the London Stock Exchange back in 1992. Today it operates 852 pubs and around 50 attached hotels. That’s down from 926 pubs back in 2016. Around 50 of its pub outlets, which allow music, trade under the under the ‘Lloyds’ brand name. 

For investors, a return to pre-pandemic sales and profitability has yet to be achieved. Previous pandemic uncertainty has been replaced by high economic outlook uncertainty, with a cost-of-living crisis potentially placing downward pressure on consumer leisure spending. Interest rates are rising, group costs such as energy are elevated, while the pub operator’s dividend payment remains suspended. 

More favourably, like-for-like sales for the early weeks of the new financial year are up from those achieved in 2021. Both supply chain and labour issues are being managed, the balance sheet has been strengthened, and a cost-of-living crisis could see consumers defecting away from higher priced rivals towards its budget model.

On balance, and while some caution remains sensible, a consensus estimate analyst fair value of over 700p per share appears to offer room for longer-term optimism. 

Positives: 

• Value customer offering
• Majority freehold properties

Negatives:

• Rising costs
• Uncertain economic outlook

The average rating of stock market analysts:

Buy