THE INVESTMENT COLUMN: No nonsense at JD Wetherspoon

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The Independent Online
The rise and rise of JD Wetherspoon is a marvellous corporate success story. Founded in 1979 by a Kiwi barrister who liked his local pub so much he bought it, the chain came to the market in 1992 with 44 pubs and has since grown to over 130. Since flotation, the shares have soared from 160p to 743p yesterday, up 21p after the announcement of another strong set of interim profits.

After a 43 per cent rise in sales for the six months to January, pre- tax profits rose by a similar amount to pounds 5.5m, earnings per share were 49 per cent better at 14.8p while the dividend increased by a more sober 13 per cent to 3.1p.

Wetherspoon's success was to see a gap in the market for no-nonsense pubs, with no music, no-smoking areas and cheap beer. They were neither overpriced wine bars nor dingy back street boozers and the public lapped them up. Unlike many of its peers, Wetherspoon did not rely on food sales and the bulk of its profits still come from drinks.

A huge success so far then, but the steep trajectory of the share price has given investors justifiable cause for concern in recent months. Their worries include the enormous cost of maintaining an ambitious opening programme, a declining rate of like-for-like sales growth, the group's depreciation policy and increasing competition from large brewers who are increasingly encroaching on Wetherspoon's niche.

Chairman Tim Martin believes he has an answer for all these concerns. Having secured a new pounds 50m debt facility from his bankers, he reckons the threat of another rights issue has receded. Even if Wetherspoon spends pounds 35m a year for the next five years, which is the plan, the company should not have to come back to shareholders during that period.

Latest figures from new pub openings show that larger, town-centre sites outside London are generating much better weekly sales than some of the older pubs - which should keep sales growth motoring, a change in accounting policy means that depreciation should satisfy even the most prudent shareholders and competition is good for the market as a whole.

On forecast profits of about pounds 12m, the shares currently trade on a prospective price earnings ratio of 24 times this year's profits, which looks quite high enough. Fundamental measures may, however, not be the best guide to this share's sustainability. If Bass or one of the other big brewer/pub owners decided to swoop they might well be prepared to pay a full price for a company that has consistently delivered the goods. Hold on.