Investment Column: Ignore the noise and order a round of JD Wetherspoon
Standard life; Solomon Gold
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Friday 04 November 2011
Our view: Buy
Share price: 426p (+4p)
JD Wetherspoon used its first-quarter update yesterday to launch a broadside on how Government policies were hitting pub companies. The operator of 833 pubs said that while its sales, profit and cash flow have been "resilient", the main challenges facing the group in the coming months will be the "continuing cost increases resulting from Government legislation, including the carbon tax, the proposed late-night levy and further increases to excise duty".
Wetherspoon pointed out that it made a post-tax profit of £46.8m in its last financial year, but paid total taxes of more than £453.1m, including VAT of £204.8m and excise duty of £120.2m.
However, while these figures lay bare the challenges facing the country's pub groups, the City was far more focused on the group's most recent sales and comments on margins for the 13 weeks to 23 October. And despite the squeeze on consumer spending, Wetherspoon delivered a resilient 1.1 per cent rise in like-for-like sales, although it is likely to have been helped by the warm autumnal weather.
The first-quarter sales growth was ahead of City expectations, but lower than the 2.1 per cent rise over the year to 24 July. But ahead of sales, we believe the impact of rising costs, including utilities, labour and bar, and food supplies, will have a bigger impact over the next year on the group's crucial operating margin, which slipped by 20 basis points to 9.4 per cent in the quarter. Despite having concerns about its margin, we believe Wetherspoon remains one of the pub sector's most reliable stocks.
Its shares trade on an undemanding forward earnings ratio of 11.7 times and offer a prospective dividend yield of 3.1. While we don't think they are set to boom suddenly over the next year, they look well-placed to continue growing. Therefore, we say ignore the Government bashing, focus on Wetherspoon's sound financials and order a round of its shares.
Our view: Hold
Share price: 209.5p (+3.6p)
Corporate pensions are where it's at for Standard Life, which has changed radically since it was a rather pompous, Edinburgh insurer that was the favourite of small financial salesmen. So it is a little worrying that its flagship product – Lifelens – was put on the back burner in the third quarter.
The idea is good, offering employees a single web-based point of access to pensions. The trouble with the idea is that its implementation has proved problematic, with the company struggling to integrate client systems with its own. The third quarter sales figures were also hardly good news, being a way below most analysts' expectations.
In the first nine months it generated £15.5bn of total sales, 10.5 per cent better than the previous year. But analysts had been forecasting £15.9bn and it seems that the third quarter has been the problem.
With those horrid three months frightening everyone, that's no surprise. But the sales of corporate pensions were a blackspot, a worry given their importance. They were up 8 per cent at just over £1bn, but that was 8 per cent lower than forecasts.
In terms of earnings multiples, Standard (at 12.6 times forecast) looks pricey compared with its rivals, although the 1.3 times forecast net tangible assets is more in line and the prospective yield of 6.6 per cent is bettered only by Aviva. We're prepared to give Standard the benefit of the doubt – for now. But if corporate sales don't pick soon, we're out.
Our view: Hold
Share price: 13.125p (-2.13p)
The mining group Solomon Gold delivered an upbeat assessment of its prospects at its Fauro project in the Solomon Islands yesterday.
The company, which drills for gold, silver, copper and diamonds on the Solomon Islands and in Australia, said it was pleased with the latest results of the exploration drilling at the key Fauro project. In the release yesterday, the company added that it "was encouraged by the recent results" and that the exploration team "is optimistic of further success".
However, despite yesterday's boost, the group's shares continued their downward slide, falling by a further 13.9 per cent last night. This brings the shares decline for the year to about 60 per cent. Furthermore, in the hit-and-miss world of gold mining, the absence of any hugely encouraging news this year has no doubt taken its toll on the share price.
The announcement of Malcolm Stewart Norris as chief executive on 4 October, to replace the retiring Nicholas Mathers, has given the shares a small lift, but it is too early to tell how things will change under his reign. Mr Norris joins from Intrepid Mines, the Indonesia-focused miner. Although we welcome his appointment, the recent weakness in the shares means that we would wait to see what Mr Norris does before adding to our portfolio.
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