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The leisure sector has had a torrid year, thanks to Covid, but pub companies have suffered more than most. In March, shares in JD Wetherspoon (LON:JDW) lost almost 20% when the first lockdown was imposed.

Founder and chairman Tim Martin, not one to hang back, has raged at the “reckless and draconian anti-pub regulations” imposed by the government that have ravaged his business and the sector since then.

JD Wetherspoon shares: like-for-like sales have crashed

Despite these trading conditions, JD Wetherspoon shares recovered enough from the March lows to almost double in value when the government announced a reopening of pubs in July. But by October, the share price slumped 14% when Martin had to report that last year’s pre-tax profits of £102m had turned into a pre-tax loss of £34m, his first since 1984. Like-for-like sales crashed 29.5%, while revenues were down more than 30% to £1.26bn. This year, no interim or final dividend payments.

A measure of Martin’s pain is that he had delivered a steady increase in sales and share price for almost 10 years, with a healthy return on capital. JD Wetherspoon has grown organically to become one of the country’s largest pub chains, with more than £1bn of property on its balance sheet, assets that are based on 1999 valuations. For investors, such a track record is the sign of stable and competent management and, with the share price looking relatively cheap at 1,121p (at close of trading on 15/1/21), a possible investment opportunity.

The arrival of the anti-Covid vaccines has improved the outlook for the sector and, although uncertainty continues to weigh on valuation, we expect shares in JD Wetherspoon to resume their previous growth pattern and to regain their 52-week high of 1,623p in due course. In the three years to January 2020, the share price gained 31.3%.

Since the March lockdown, and despite the succession of ‘anti-pub’ rules, shares have gained 100.3%.

A date for your diary

On the 21st of October, Stuart Fieldhouse will be joining Sarah Lowther and Mark Watson-Mitchell to discuss which small cap investments they like the look of and, perhaps, which ones they do not. It promises to be a lively and insightful discussion. If you are interested in investing in small cap stocks then this could be a profitable use of your time. We hope you can make it! Sign up now

Debt could pose significant investment risk

JD Wetherspoon is currently unprofitable, and has substantial capital debts, an indication of how it has been financing its growth to date. Its debt-to-equity ratio stands at 4.9, which represents a significant investment risk, particularly if interest rates should start mounting. However, analysts are forecasting revenue growth of 13.1%, which compares well against its peers’ 11.8% and the UK market’s 6.5%, while earnings growth of just over 98% is set to outpace rivals by almost a third.

Relatively speaking, JD Wetherspoon is in a stronger position than many of its smaller rivals, which means JD Wetherspoon could continue building market share as before, or sell real estate assets to pay off debt. In December, Jefferies upped its price target and now rates JD Wetherspoon as a Buy.

JD Wetherspoon and the rest of the pubs sector are not out of the woods yet. Martin has warned of a cliff-edge for his business this spring when the government’s emergency support measures for the sector, including business rates relief and the cut in VAT from 20% to 5%, are due to end.

Martin has called for the measures to be extended for at least a year, indicating perhaps that he only expects a slow and fragile recovery at best. A better picture of JD Wetherspoon’s performance will soon be available, with its trading statement due out later this week (on 20th January).

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

James Norris

James Norris

James is a highly experienced writer and editor, gained from more than 20 years in the financial services industry, in particular wealth management and asset management.

He initially worked as a financial journalist for a number of leading media brands, including the FT Group, Financial News, Euromoney and Incisive Media, covering most aspects of the asset management industry. More recently, James switched to work as an in-house content specialist for fund management and wealth management groups, including JP Morgan Asset Management, Quilter Cheviot Investment Management, AXA Investment Managers and Invesco Perpetual.

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A date for your diary

On the 21st of October, Stuart Fieldhouse will be joining Sarah Lowther and Mark Watson-Mitchell to discuss which small cap investments they like the look of and, perhaps, which ones they do not. It promises to be a lively and insightful discussion. If you are interested in investing in small cap stocks then this could be a profitable use of your time. We hope you can make it! Sign up now

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