Tue 28th Oct 2014 - Senior analyst increases JDW share price target Senior analyst increases JDW share price target: Numis Securities leisure analyst Douglas Jack has increased his price target for JD Wetherspoon (JDW) shares to 950p from 900p, forecasting 47% earnings growth in the next three years. JDW’s first quarter trading update is due on Wednesday 5 November. Jack said: “We expect like-for-like sales to be up at least 5%, maintaining the momentum the company generated during the first seven weeks. We forecast 16% Earnings Per Share growth in 2015E and are increasing our target price to 950p (from 900p), on which basis we assume the current rating holds. Like-for-like sales rose 6.3% (vs. 3.6% comp) during the first six weeks to 7 September, outperforming a managed pub sector that grew like-for-like sales by 1.1% in July, followed by -0.2% in August and +1.5% in September (CGA Peach Tracker). Comparatives remain relatively easy (at 3.7%) in Quarter One, before rising to 6.0% in Quarters Two to Four. Our full year forecast assumption is 3.5%, which should be achievable. However, JDW continues to under-perform the sector in relation to margins. Last year, Ebit margins fell 49bps to 8.2%, including an 80bps fall in H2, partly due to increases in staff and repair costs. Margin guidance for 2015E is 7.7-8.1% (we and consensus target 7.9%) anticipating higher business rates, machine gaming duty and carbon levy costs. Margins are not correlated to like-for-like sales because pricing (vs. costs) is margins’ principal influence. We estimate benign cost categories, such as food and rent, account for circa 40% of JDW’s cost base. Overall, our forecast of 30bps margin decline anticipates 3.8% average cost/pub inflation this year (last year average costs/pub rose 5.8% versus 5.5% like-for-like sales). Thus, margins are most reliant on pricing behaviour. Last year, margin weakness reflected lower price inflation, which in H2 more than offset the benefit of machine income rising 3.8% (versus H1’s 9.5% decline). Historically, management has emphasised maximising cash profits, but like-for-like profits have been most correlated to price increases. Currently, “the key focus for management is how we grow sales”. We are increasing our target to 950p, on which basis we assume the current 15x PE (8.3x EV/Ebitda) rating holds. We are forecasting 47% of earnings growth over the next three years: 11% due to like-for-like profits; 14% due to expansion; 14% due to lower swap costs; 8% due share buy backs / lower tax rate. We believe the strongest catalysts for upgrades and a re-rating would be higher pricing and margins.”