Broker snap: Wetherspoon's sector discount unjustified

15th Jul 2009 11:29

Brokers Charles Stanley and KBC Peel Hunt are united in their admiration for pubs group JD Wetherspoon, which on Wednesday morning said like-for-like sales in the 50 weeks to July increased 1.2%.Charles Stanley said Wetherspoon's outlook has turned "far more positive", with management confident of achieving market expectations for the current financial year, which the broker takes to mean it will hit the top end of the forecast range for pre-tax profit, which spans from £53m to £64.2m. Charles Stanley is forecasting profit before tax of £63.2m.The broker rates the stock a buy, noting that it trades below the Enterprise Value/Earnings before interest, tax, depreciation and amortisation ratio for the second despite running a wholly managed estate and therefore exerting greater operational control.Charles Stanley has retained its price target of 495p.KBC Peel Hunt is also a buyer of the shares with a price target of 520p. "A fully managed and branded system with excellent execution of its value-based offer does not really merit a 25% EV/EBITDA discount to the rest of the sector for FY10E," KBC asserts. The broker has upgraded its profit before tax forecast for fiscal 2009 to £62.7m from £58m following the trading update. The debt outlook has also improved more than KBC had been expecting. "Net debt has been reduced by £40m for the year, approximately £15m better than we were anticipating, to £354m. Wetherspoon has a number of options in the refinancing of its £370m bank facility due December 2010. Once the refinancing has been agreed we would expect resumption of the dividend in FY11," KBC predicts.