Cube Report (27 Nov 2020) – “Stealth” lockdown hits Wetherspoons

Cube Report (27 Nov 2020) – “Stealth” lockdown hits Wetherspoons

Good morning, it’s Roland here with Friday’s Cube Report.

It’s a relatively quiet day for news, but we do have updates from a couple of interesting mid caps — pub chain JD Wetherspoon and newspaper group Reach.


JD Wetherspoon

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Market cap £1.4 billion
RNS Business update
Writer disclosure No position

We can always rely on Wetherspoon’s founder Tim Martin to provide timely updates on how he thinks the country should be run. Mr Martin hasn’t let us down today. He accuses the government of extending lockdown “by stealth, in large swathes of the country.” If you didn’t catch the news last night, this relates to the revised tier system that applies across England and other parts of the UK.

More seriously, these tier allocations will have a big impact on Wetherspoon (and all other food and drink operators). The company says that 366 of its 865 pubs will remain closed, as they are located in tier three regions of England or equivalent areas of Scotland and Northern Ireland.

Opening for takeaways — as permitted by the rules — is “unlikely to be a realistic proposition”.

As is his custom, Mr Martin includes a lengthy statement explaining why he thinks pubs are being unfairly targeted by the rules. Unfortunately, he doesn’t include any information on how he thinks the latest restrictions might affect Wetherspoon’s trading for the rest of the year.

Recovery looked priced in?

When looking for potential recovery plays, we need to consider the dilution and extra borrowing that many firms have required to survive this year.

Despite recent gains, Wetherspoon’s share price is still down by about 35% so far this year. However, the group’s share count rose by 15% in April when it raised £137.7m in a placing. Wetherspoon’s net debt has also risen, from £737m at the end of July 2019 to £817m at the same point this year (excluding lease liabilities, for the purposes of comparison with last year’s pre-IFRS16 figure).

I estimate these fundraising activities mean that the group’s enterprise value (market cap plus net debt) is largely unchanged at c.£2.3bn from one year ago, even with the lower share price.

I expect Wetherspoons to make a full recovery from the pandemic during the 21/22 financial year (y/end 26 July). But my sums suggest the company now trades on an EV/EBIT multiple of 18, using last year’s record profits. That’s equivalent to an earnings yield of 5.5%. That looks fairly priced to me.

In terms of earnings, the stock now trades on 19 times 2021/22 forecast earnings, taking into account the dilution caused by this year’s placing. That’s almost identical to the 20x forecast multiple seen one year ago, before the pandemic.

My view: I think Wetherspoon’s shares are already priced for a recovery. I’d need a larger margin of safety to persuade me to buy.


Reach

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Market cap £500m
RNS Trading update
Writer disclosure No position

More good news for holders of this newspaper group, which owns the Mirror and Express newspapers, plus a swathe of regional papers.

Reach says that trading has been ahead of expectations during the five months to 22 November. Digital revenue rose by 16.2% during the period, helped by “increased customer engagement”.

Sales of print newspapers continue to fall, with print revenue down by 19.6% during the period. Weirdly, this is described as “resilient”. I’d hate to see a bad performance.

In total, Reach’s revenue fell by 13.9% over the five-month period concerned.

There are various metrics showing improved digital activity, but as far as I can see this business essentially remains a bet on whether Reach can move its profits online before print profits fall too low. Fittingly, the company is now run by ex-Ladbrokes boss Jim Mullen.

My view: Reach shares have three-bagged since August. Well done to anyone who caught this bounce. However, the group’s revenue is expected to fall by 17% to £584m this year. Earnings per share are expected to drop 28% to 29.4p.

Reach shares are trading on five times forecast earnings after their recent bounce. If Mr Mullen can convert the business to a growing, profitable digital publisher, then this stock might be cheap. I’ve no insight into whether this will be possible, but I have to admit to some scepticism.

I don’t have enough conviction to consider buying Reach shares.


That’s all for today — as always, all feedback (and thumbs up) will be gratefully received.

Thanks for reading and have a great weekend.

Roland

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    I think it was said that Reach is all about building a “super data base” of UK customers and then monitising it . The stategy was to convert local print news readers to digital news sites with collection of their ” detailed data” required for them gaining digital site acccess . Thus I would not see legacy print titles being too vital in the longer term.

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