Analyst – might JD Wetherspoon need to sell 100 pubs? Morgan Stanley leisure analyst Vaughan Lewis has suggested that JD Wetherspoon may need to sell 100 pubs. He stated: “Sales growth is slowing, pub numbers are shrinking, margin pressure is accelerating, debt is rising, and returns are falling. With these major headwinds, we use our proprietary disposal model to assess our bear case for around 100 pub exits, and remain Underweight. For the first time in its history, Wetherspoon’s estate will shrink this year. The company has c.50 pubs for sale, with it blaming cannibalisation and outgrowing some older small pubs. We use our proprietary model to highlight that circa 100 pubs have another JD Wetherspoon pub within 500 metres. While our base case assumes 35 pubs are sold this year, we think our bear case for c.100 disposals over the next two years is becoming more plausible. With high alternative supply (high-street restaurants and coffee shops), and supermarket discounting, value-led pubs are under pressure, and we see downside risks to our forecasts for 3% like-for-like sales growth in the next couple of years. Operating margins have been broadly in decline for over 20 years, with an average decline of 50bps per year for the last 20 years. However, margin pressure seems to be accelerating, with an operating margin drop in F2015 of 80bps, and H1 F2016 seeing a decline of 110bps. With margins at c.6% now, there is limited wiggle room. We estimate cumulative net capex of c.£0.7bn from 2012 to 2016e, yet our 2016 Ebitda forecast of £169m is only marginally above the 2012 level of £156m. We estimate that net debt in July 2016 will be £140m higher than in 2012. With returns falling and debt rising to peak levels, we think funding problems could start to emerge, and see scope for share buybacks that have supported the shares price as limited now. Wetherspoon has a long track record of innovation, growth and strong cash generation. With its low margins, operational gearing is very high, such that every 1% on like-for-like sales is worth c.7% to EPS, on our estimates, and every 1% to pricing is worth c.19% to EPS. Our 850p bull case assumes circa 4% like-for-like sales growth, Ebit margins rising to 7.2%, and an average P/E multiple of 14x.”

Charles Wells reports 4% increase in operating profit: Charles Wells has announced an increase of 4% in operating profit before exceptional costs alongside a steady programme of investment in its assets. The Bedford based brewer and pub operator recorded an operating profit of £8m in its annual accounts for the year to September 2015, attributed to steady sales margins and strong cost control across the group. Turnover rose by £1.7m to £188.9m in the same period whilst total borrowings were reduced from £51.2m to £49.8m. Investment of over £3m has been committed to improvements within the brewery including replacement of the Brewhouse control system and £2.5m was spent on the UK tenanted & leased estate within an overall refurbishment budget of £4m. Charles Wells also expanded its managed house portfolio with four sites now in its Apostrophe pubs division. An ongoing focus on property development and licensee support contributed to an improvement in licensee retention rates with 96% of recent appointments still being in place after 18 months and 84% after 36 months, up 4% on last year. Announcing the results, chief executive Justin Phillimore said: “The year has been one of steady progress in many areas. Beer sales volume increased and in retailing we invested in new pub developments to good effect. Improved sales were driven by new products and marketing promotions, with Young’s London Stout and Estrella Damm demonstrating particularly effective marketing and vigorous sales. Outside the UK volumes were impacted by a number of factors, including the weakening Euro and further sanctions in Russia, yet we retained our proportion of sales outside the UK at 17% of total sales. Equally, our French pubs weathered the economic downturn in France and ongoing negotiations enabled us to purchase two pubs subsequent to the year end, bringing our total to 13 sites. Our new concept, the English Country Kitchen, has been building a reputation in the blossoming tea room market and is recording a good level of turnover. We have had many challenges and consumer confidence still seems to be recovering but we have made great progress and our plans will continue to deliver results in 2016. I am confident that the hard work and commitment of everyone at Charles Wells will drive development of our beer brand and pub portfolio even further, ensuring that the consumer remains at the heart of everything we do.”

Easyhotel acquires Birmingham option: Easyhotel a has conditionally acquired the 125 year leasehold of 81-91 John Bright Street in Birmingham, which it intends to convert into an Easyhotel. The purchase of the property is subject to Easyhotel obtaining planning consent for a hotel. The property is situated in the heart of the city centre, 120 metres from the new entrance to Birmingham New Street Station and 500 metres from the Bullring shopping centre and is surrounded by an array of popular shops, bars, restaurants and other local attractions. The Group plans to convert the building into an 84-room Easyhotel, which is expected to open in 2017. Total cost of the purchase and conversion of the building will be approximately £4.5 million. Chief executive Guy Parsons said: “We are delighted to be investing in the UK’s second largest city. Along with its six universities and internationally reputed arts scene, Birmingham is also the UK’s fourth largest tourist destination, with 34 million visitors in 2014. We see significant opportunity for Easyhotel to service business customers and leisure visitors to Birmingham’s lively events programmes and look forward to building our brand presence in the city. In line with the strategy, the current financial year to date has seen an acceleration in both the owned and franchised hotel development pipelines as the Company continues to establish itself as the leading branded super budget chain.”