Wetherspoon's beer "unnecessarily" cheap, Numis downgrades to 'hold'

21st Jan 2015 09:24

A slowdown in like-for-like (LFL) sales growth at pub group JD Wetherspoon has prompted Numis Securities to cut its rating on the stock from 'add' to 'hold' and lower its forecasts, with the broker cautioning about the company's price position.Numis said with consumer spending rising and customers beginning to "trade up", restaurants and premium pubs/bars sector will benefit, while those "trapped in discounting" such as Wetherpoon will face downgrade momentum.Wetherspoon LFL sales growth eased from 6.3% in the first quarter to just 2.8% in the second.The slowdown reflected comparatives with last year becoming tougher, largely due to the extension of food trading hours in the autumn of 2013, Numis said.However, Numis said what was more important was that operating margins in the first half as a whole fell 90 basis points (bp) year-on-year to 7.3%.The broker said: "This largely reflects average beer prices rising by only 1.1% in the year to December 2014 (source CGA) versus higher increases in labour, utility and supplier costs. Based on CGA data, we estimate that JDW's beer price discount to the sector has grown over the last three years, from 14.5% to 17.6%, which is unnecessarily large, in our view."Numis has lowered its pre-tax profit estimate for the year ending July 2015 from £84.7m to £81.2, below the current consensus forecast of £82.9m. It assumes LFL sales growth of 4% and an 80bp fall in operating margins."For [financial years ending] 2016 and 2017, we now assume no recovery in margins, even though purchasing cost pressure should be benign. That would require management to put prices up sufficiently to cover cost increases, which they are not committed to doing. They appear focused on supermarket competition," the broker said.Numis lowered its target price from 950p to 875p for Wethersoon's shares, which were down 2.4% at 799.5p by 10:15."A premium market position is worth a premium valuation; and a discount market position is worth a discount valuation," it said.