View from City Road: Wetherspoon worth a round

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The Independent Online
J D WETHERSPOON, a 44-strong chain of London pubs, had the good luck to reveal its flotation price of 160p a share yesterday, when the market was in buoyant mood. This price will capitalise the rapidly expanding business at pounds 45.6m.

The placing and intermediaries offer will raise about pounds 17.4m to pay for the immediate development of 18 pub sites, according to J D's tried and tested formula. The balance of pounds 5.3m is being raised by existing shareholders, including Smith & Newcastle.

In the 13 years since Tim Martin, chairman, bought his first pub, the chain has expanded rapidly. Unusually, J D has specialised in converting vacant commercial property, rather than buying existing pubs. That lets it choose the best sites. It has developed a uniform brand image and sells real ales at the competitive price of pounds 1.05 a pint.

Turnover has increased by 203 per cent to pounds 21.4m over the last two years, pre-tax profit by 245 per cent to pounds 2.1m and pro forma earnings per share by 225 per cent to 13.3p.

Present trading is proving resilient to the recession. Turnover is showing a 2 per cent like-for-like increase on last year.

Mr Martin is showing his confidence in the company's future by holding on to 25 per cent of the company after the issue.

On a historic price earnings ratio of 12.9 times, the shares are on a significant discount to the prevailing market multiple of about 15.5 times. If J D had paid a net dividend of 4.8p a share for the year to 31 July, which the directors said they would have if the shares had been trading, the gross yield at the issue price would be 4 per cent.

Given these numbers, the shares will probably go to a premium when trading starts. They are worth buying.