Sunday 22 April 2018

Share watch: A plethora of craft beers is now 'your only man'

Tim Martin, chairman and founder of J.D.Wetherspoons: Photo: Graham Barclay/Bloomberg News
Tim Martin, chairman and founder of J.D.Wetherspoons: Photo: Graham Barclay/Bloomberg News

John Lynch

Flann O'Brien declared that 'When money's tight and hard to get, and your horse an also ran; When all you have is a heap of debt - A pint of plain is your only man.' When this precious piece of philosophy was handed down, they were indeed simpler times.

Fifty years ago, for instance, during the last 1916 commemoration, Guinness was the acknowledged giant of the drinks sector, controlling 80-90pc of the business; lager was unknown in Irish pubs, there were few ales, it was almost literally true that the pint of plain was 'your only man'.

We have certainly made up for it since then. The newest explosion of craft brewing in this country is now in its third or fourth phase; every town and village seems to be making its own claim for the 'best pint in Ireland' award.

And the changes that have taken place in the drinks retailing sector have also come thick and fast. Most interesting of all has been the arrival in the Republic of the British pubs chain, JD Wetherspoon.

It arrived here with a flurry of challenges to the status quo. It said it would not be selling Guinness as 'it couldn't agree a price' with Diageo. That seemed a brave start.

The founder, Tim Martin, professed to be inspired by an Orwellian vision of a utopian boozer. One that's free of music with cheap food and drink. He has done much to live up to that, with daily deals like Mexican Monday, Fish Friday, Howling Gale Ale, gluten free beer, to name a few - and no music.

Founded in 1983, the company was floated on the stock exchange in 1992. Today Wetherspoon has a market value of £806m, employs over 33,000 people and has over 950 pubs.

The chairman has let it be known that he travels two days each week, visiting his pubs unannounced, noting even the size of the froth on the cappuccino.

Recently he backed the campaign for the UK to leave the EU, breaking ranks with other industry leaders.

Wetherspoon pubs generated last year revenues of £1.5bn, a seven-fold increase since its flotation. While sales are growing by 3pc, labour costs pose a problem. Profit before tax has been under fire for some time and last year slumped 25pc to £59m. Earlier this year Wetherspoon warned that full year profits would not meet expectations, citing lower gross margins, increases in both staff and utility costs, as the main reasons. Capital expenditure for the year was £173m, mainly for new pubs, but this expansion is pushing up debt.

During the year, 3pc of shares were repurchased at a cost of £27m, which should help earnings per share to rise. The shares are trading in the 690p region, below its yearly high of 810p with a price earnings multiple of a high 16. Interestingly, the company pays 40pc of its profits as a bonus or free shares to employees.

Mr Martin (who holds 30pc of the shares) has interesting views on many things. He thinks corporate governance is 'deeply flawed', placing too much emphasis on meetings between management and short-term institutional shareholders but silent in relation to customers and employees. He has come to the conclusion that annual reports are too long and unreadable. They are in his opinion 'semi-literate', replete with business and accounting jargon and cluttered with wordy governance reports.

He also likes the chairman of the enterprise to have previously been the CEO because it forces him/her into a long-term perspective.

Many of these views would be contentious for institutional investors but I'm certain it would make for vigorous discussions in any MBA class. The shares have had a decent run since 2013 but with limited pricing and increasing costs, growth could be a problem. The future impact of the UK government's 'living wage' could be an issue but I suspect less so for Wetherspoon than its competitors. However, I would not be in the market for its shares at the present moment.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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