Is there 80% upside for this pub chain’s shares?
29th November 2022 15:09
by Graeme Evans from interactive investor
Beyond the World Cup, the winter outlook for the pubs sector looks grim. However, a City bank has spotted cause for longer-term cheer.
Pub chains Wetherspoon (J D) (LSE:JDW) and Mitchells & Butlers (LSE:MAB) are being backed to survive and then thrive after a City bank carried out a review of the unloved sector.
Jefferies lowered its price targets due to the looming consumer spending squeeze, but believes stronger players will eventually benefit as they snap up market share.
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The bank’s analysts said: “Looking through to the medium term, we expect that inflationary pressures will drive pricing up.
“Well-capitalised, well-invested operators with relevant consumer offerings will survive and grab market share. Inflationary pressures will roll over, prices stick and survivors thrive.”
In the case of Wetherspoon, the US bank’s new target price of 850p represents an upside of more than 80%.
It points out that the chain has financial and product characteristics that should mitigate trading pressures, including a 68% freehold estate and a manageable debt position.
Energy costs fixed until the end of the 2023 financial year and long-term food and drink contracts are among other positives, along with a pricing differential to peers.
The shares have fallen more than 50% this year and trade on 4.5 times 2024 earnings, which compares with a pre-Covid valuation range of between nine and 11 times. Jefferies adds that shares are effectively pricing in a 50% cut to underlying earnings.
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On Mitchells & Butlers, its new 170p price target represents a potential 20% upside. It trades on 7.8 times underlying 2023 earnings, against about eight times pre-pandemic.
As a large-scale operator, Jefferies believes M&B is relatively better positioned to cope with the wave of inflationary cost pressures.
It adds: “With a well-invested, 80% freehold, well-located, food-oriented pub estate, we argue that M&B should gain material market share as other smaller operators struggle.”
Elsewhere in the sector, Jefferies believes the estate repositioning and recapitalisation undertaken by Restaurant Group (LSE:RTN) during Covid has left the Wagamama business in a relatively better position for future growth.
It said: “Management has taken decisive action to lock in utility costs and interest costs. Cash flow should be sufficient to fund a modest growth capex programme to roll-out Wagamama, Barburrito and pubs.”
The bank’s new price target of 45p represents a potential 35% upside. Its analysts are less keen on Marston's (LSE:MARS), arguing that leverage is too high and that this will limit capital expenditure and dividend opportunities. Its new target of 27p reflects a 30% downside to Friday’s price.
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