Hospitality groups have been hit with a wave of downgrades by Deutsche Bank following the rises in the minimum wage and National Insurance unveiled by the Labour Government.
Greggs is the standout change, with its rating cut to 'sell' from 'hold' with a target price now of 2,400p (2,600p previously) though pub chain Mitchells & Butlers is now a 'hold' from 'buy' (target 280p from 360p).
Wetherspoons meanwhile has had its target cut to 600p from 750p with its 'hold' rating maintained.
Last week's Budget contained several measures on minimum wages and National Insurance that are “disproportionately relevant” to the labour-intensive leisure sector, says the bank.
While flagged beforehand, in magnitude (or structure) the bank adds that they were worse than factored into company guidance and investor expectations.
“We expect operators to raise prices but do not view this as a panacea: full recovery would require over 5% increases at a time of slowing CPI [inflation] growth."
Deutsche Bank notes that the hospitality sector's premium to CPI growth has not exceeded two percentage points in over 20 years.
“We see the parts of the sector with high gross margin/low labour intensity as best placed, whereas high-service, lower margin operators have less protection and most downside risk to consensus estimates.”
Greggs slumped 7% on the note with Mitchells & Butlers down 6% at 237p while Spoons was flat at 630p.