We’ve been thinking about pubs this week, and not just because the 10pm curfew has focused the minds of seasoned boozers in England. We’re looking at the listed pub sector from an investment perspective too – is it “last orders” for the battered sector or should shareholders expect “one more the road” as the hospitality sector re-opens?
Our stock of the week is high street pub chain JD Wetherspoon (JDW), as voted (by a very large margin) by our Twitter followers. Wetherspoons - or “Spoons” to the initiated - is by far the largest publicly-listed pub company with a market capitalisation of £1 billion, making it a member of the FTSE 250.
Shareholders have enjoyed bumper returns since the company floated in 1992, with only the enforced shutdown of the UK pub sector from March to July this year bringing its winning streak to abrupt halt. It floated at around 30p and, taking into account stock splits, had hit a record high of £16 before the pandemic struck. But the shares have halved this year as the sector has been floored by coronavirus restrictions. Wetherspoons issued a profit warning on March 18 and cancelled its dividend – the last payout that shareholders received was in November 2019, a final dividend of 8p per share.
In its latest trading update at the end of August, the company said that 844 out of 873 pubs are now open, but some airport and train station branches remain closed. Wetherspoons expects to make a loss for the last financial year (against a profit of nearly £100 million last year), with results expected in early October. The Eat Out to Help Out scheme, a temporary measure to boost midweek sales in pubs and restaurants, has helped sales, the company said. We recently wrote about the scheme and how it has affected Beefeater-operator and former stock of the week Whitbread (WTB).
Cheap and Cheerful
But as Russ Mould, AJ Bell’s investment director, points out, the end of the scheme will present problems for Wetherspoons’ value-conscious punters. “What really matters now is how the business fares without the sales incentive and if it can avoid pushing up prices to help claw back some of the lost revenue from earlier this year. It cannot afford to upset customers who are already in a fragile state of mind.”
On the flipside, as the economic backdrop darkens, Wetherspoons’ proposition of cheap booze and grub could come to the fore. “Value-led operators are arguably better placed to get through the crisis as the public will be paying a lot closer attention to their spending patterns,” Mould says.
After the latest trading update, James Wheatcroft, analyst at Jefferies, said that the company should bounce back quickly now the pubs have re-opened (albeit with reduced trading hours). “We continue to think that JD Wetherspoon’s strong position within the UK pub sector – consumer traction and well-located, largely freehold estate – should allow it to return to former profitability fast.”
What are the risks to investors? The possibility of a second lockdown cannot be discounted, which would have a devastating effect on the pubs and restaurants sector after an already dismal year so far. On the other hand, the UK Government appears keen (for now) to avoid a national lockdown for economic reasons.
As always, outspoken founder Tim Martin has his own opinion on the matter: “I believe, on the balance of the arguments, that avoiding full lockdowns and adopting the Swedish approach, is the better solution.”
Controversy, from Martin’s views on Brexit to a social media campaign this year to boycott the chain, could put off more sober-minded investors. Still, ESG ratings agency Sustainalytics ranks the company as medium risk, with a score of 22.5 out of 100, and a score of 48 out of 100 for corporate governance. Wetherspoons is rated as a 2 (out of 5) for controversies, which Sustainalytics ranks as “moderate”.
A number of UK funds hold Wetherspoon, including mid-cap and equity income offerings. Columbia Threadneedle is a large shareholder, with around 15% of the company, and the pub chain is held by a number of its UK funds.