JD Wetherspoon (JDW) has won the praise of analysts at Nomura for its "swift" reaction to the stagnant sales and margin pressures seen in the 2012 fiscal year.

During that period the pub owner saw like-for-like (LFL) sales growth of just 3.2%, which was insufficient to fully offset pressure on gross margins, utility cost inflation and higher expenditure on repairs. As a result, margins fell by 50 basis points to 9%. There are 100 basis points to a full percentage point.

However, in its fourth quarter LFL sales grew 6.1% and the company only saw 30 basis points of margin pressure.

Furthermore, momentum continued into the start of fiscal year 2013 (six weeks to 9 September) with LFL sales up by +8.4%. That was materially better than the industry data (Peach Tracker +2.1% in August) and suggests that JDW is taking market share, the broker explains.

Critically, Nomura adds that the company has the highest operational gearing of the peer group and each 1 percentage point of LFL sales adds 10% to earnings per share. Related to all of the above, their current fiscal year 2013 assumption implies LFL sales growth of circa 2% for the remainder of the year.

JDW trades at a calendar year 2013E price-to-earnings (P/E) multiple of 10.2x, an Enterprise Value/Earnings before interest, tax, depreciation and amortisation (EV/EBITDA) of 6.4x and a free cash flow (FCF) yield of 9%. That compares with the pub sector average P/E of 10.6x and M&B on 8.5x.

For all of the above reasons Nomura has decided to raise its target price to 465p and its recommendation to Neutral (from Sell), adding that it believes that there is risk to the upside if the current sales momentum can be maintained.

AB

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