Why JD Wetherspoon shares just surged 30%

Factoring in the apocalypse, the pub chain has rewarded bargain hunters. Our head of markets reports.

This half-year report is likely to draw a line in the sand for Wetherspoons (LSE:JDW).

On the one hand, the performance in the year to date has been positive on any number of metrics, but the second half of the year could play out to be one of the most difficult in the company’s history, certainly if the government extends its current advice to avoid pubs and restaurants to an outright ban. 

The recent share price performance had certainly been factoring in that apocalyptic outcome.

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Despite the challenges of generally poor weather and floods across the country, Wetherspoons enjoyed an increase in revenues of 4.9% and like-for-like sales up 5% which contributed to a hike in pre-tax profits of over 15%.

At the same time, earnings per share showed a healthy increase of nearly 16%, the share buyback programme provided some support, and the company’s increasing investment in freehold properties showed confidence in future prospects.

The rug which has now been pulled by the coronavirus and the subsequent government advice has already had a material impact on sales in the last few days.

As such, Wetherspoons is unable to provide any meaningful guidance for the remainder of the year, which is becoming an increasingly common but understandable mantra from boardrooms. 

Source: TradingView Past performance is not a guide to future performance

Inevitably, the company will make every effort to contain costs, delay most capital projects and an immediate casualty has been the interim dividend, which has been cancelled. 

Some relief should wash through in the form of business rates relief, but this could be of limited comfort to a company whose net debt has risen by 9% compared to its previous year end, as it was previously continuing on its growth phase.

The normality of everyday life and the previous takeover froth in the sector around companies such as Greene King and EI Group seems an increasingly distant memory. 

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For companies such as Wetherspoons, the next few months could be critical in establishing the company’s future shape. This should not be existential, since the group is confident that its overall financial health is sufficient to withstand the imminent difficulties, but, from an investment perspective, the outlook is unclear.

The immediate reaction to the group’s defiant tone and a strong broader market open has clearly struck a note with investors in early trading – the share price surged by over 30% - although very light volumes may be flattering the share price hike. 

Prior to the results, the share price had plummeted 66% over the last three months and was not much better over the last year, where a 59% decline compared to a 34% drop for the wider FTSE 250. 

The market consensus of the shares as a “weak hold” is unfortunately likely to come under further downward pressure until some sort of normality can be restored.