Broker tips: JD Wetherspoon, First Property, EnCore

5th Oct 2010 13:04

Charles Stanley Securities expects sales growth at JD Wetherspoon (JDW) as the group confidently moves from cash conservation into estate development. Analyst James Dawson antipates this increase through new site add-ons rather than like-for-like sales growth, although higher repairs are now deemed necessary to freshen up the mature sites.The continually growing pub estate offers drinks producers a significant degree of reach in terms of geographic exposure. While the group does not wield ultimate power over the brewers, it is apparent that JDW's estate remains a strong route to market for their products.JDW continues to assert its high street core competence and with uncertainty among other similarly located brands, the group should capitalise further in the short term, Dawson reckons. Mitchells & Butlers' exit of 373 pubs demonstrates the transition that is underway among other estates, however there are likely to be near term performance implications for those involved in the consolidation process.Dawson comments that "despite a healthy like-for-like sales growth start to fiscal year 2011 we expect the group to finish with a more muted figure as the January 2011 VAT increase impacts." The broker's forecasts for fiscal years 2011 and 2012 assume virtually no like-for-like sales growth. "That said, the new site pipeline appears strong with 50 sites per year targeted, although JDW may experience greater interest in the sites it bids for.""The group stands on a current year 2011 enterprise value/earnings before interest, taxes and rent multiple of 9.6x, an unwarranted 13% discount to the UK pub sector given operational strength of this business." The broker has upgraded the stock to 'add' from 'hold' and reiterated the price target of 510p.Fund manager First Property has launched a new fund, Fprop Opportunity (FOP) to invest in commercial property in Europe, concentrating on Poland, in a move which house broker Arden sees as a step towards a simpler business model for the company.The fund will have a 10 year life and will focus on property that has an attractive yield which, with gearing, should be able to generate returns on equity in excess of 15%. External investors will be able to invest along side First Property (Fprop) in FOP, the broker noted."In the medium/longer term we see this move as a step towards a simpler business model, with Fprop becoming primarily a property fund manager, with co-investments in its funds. This closely aligns Fprop interests with its external investment clients," Arden Partners analyst Chris Thomas said."The group remains very significantly undervalued from both an assets and earnings perspective. The PE [price/earnings ratio] is 8.6x falling to 7.6x and there is an attractive and growing yield of 6.1%, which is 2x covered. We reiterate our Buy recommendation," the broker concluded.Despite the sharp rise recently in the share price of EnCore Oil, the company's exposure to two significant North Sea finds means the stock is still worth buying, according to Westhouse Securities, the company's Nominated Adviser (nomad)."The Catcher and Cladhan discoveries have greatly enhanced the valuation of the company," said the broker, which has lifted its target price for the stock to 163p.The broker cited a number of reasons for the continued rise in its corporate valuation, namely:1. The inclusion of the Catcher discovery in the valuation and the increase in the assumed size of the Cladhan discovery.2. Increased potential reserves from both Catcher and Cladhan.3. The derisking of both the discoveries and potential reserves.4. The reduction of discounts to NAV in the sector as a result of the KNOC bid for Dana and the derisking of North Sea exploration generally.The company announced a successful appraisal well on the Cladhan discovery on Monday and plans for a further well there in the near future, the broker noted.