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Margin worries lead two brokers to downgrade ratings for JD Wetherspoon ahead of interims

Published: 09:47 06 Mar 2017 GMT

Wetherspoon boss TimeMartin
In early trading, Wetherspoon was one of the biggest FTSE 250 fallers, with its shares down 3.4%

Pubs operator JD Wetherspoon PLC (LON:JDW) was battered by a pair of broker downgrades this morning, with both Peel Hunt and Shore Capital cutting their ratings on the firm amid worries over margins ahead of its interim results, expected this Friday.

In early morning trading, Wetherspoon was one of the biggest FTSE 250 fallers, with its shares down 3.4%, or 34.0p at 955.5p.

Peel Hunt has downgraded its rating for Wetherspoon to ‘reduce’ from ‘hold’ with a target price of 925p.

In a note to clients, Peel Hunt analyst Douglas Jack forecasts the pubs operator reporting a 50% jump in first-half pre-tax profits to £48mln “as a result of total sales rising by 1.6% and margins rising by 170bps.”

He said: “We believe this largely reflects average drink prices rising by 5.4% vs H116. However, we expect average drinks pricing to be flat in H2 vs, resulting in much of H1’s margin increase reversing in H2.”

The analyst added: “This is likely to be compounded by LFL sales slowing, from +3.4% in H1 to c.2% due to tougher comps in H2 (3.9% vs H1’s 2.9%).

“As a consequence, our forecast anticipates a 110bps fall in H2, also reflecting the timing of the impact of business rates (£7m pa from April), the Apprenticeship Levy (£2m pa from April) and increasing imported food and drinks costs.”

All the way to sell …

Meanwhile, Shore Capital also highlighted margin concerns in a note downgrading its stance for Wetherspoon to ‘sell’ from ‘hold’.

Shore analyst Greg Johnson pointed out that in its pre-close trading update last July Wetherspoon “delivered a much better than anticipated margin performance, which has continued into the current year, snapping a long-term downward trend.”

In a note to clients, he said: “The subsequent re-rating leaves the stock trading on multi-year multiple highs and we believe the market is now pricing in a recovery in margins to c10%; a level not achieved since FY2010.”

The analyst added: “Although we see JDW as a first-rate operator with scope to build margins from current levels, industry headwinds could limit progress. With limited visibility and a high sensitivity to margin development we downgrade from Hold to Sell.”

He concluded: “We believe that the aggressive re-rating beyond past metrics leaves investors exposed should margins not recover towards 10% in the medium term.

“Should margins fail to build from current levels, fair value could be c650p per share.”

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