Broker tips: JD Wetherspoon, WH Smith, Shawbrook

JD Wetherspoon was under pressure on Wednesday as Investec cut its target price to 760p from 800p after the pub operator guided full year profits lower.

In a trading statement, chairman Tim Martin warned that full year profits “were likely to below the lower end of analysts’ expectations” of £69m-£78m.

The group reported that like-for-like sales (LFL) rose 3.3% and total sales by 6.3% in the first 12 weeks of the second quarter, meaning LFL sales have grown 2.8% in the year to date and total sales by 6.1%.

However, the company said operating margins would be around 6.3% in the first half, 1.1% lower than the same period last year due to the 13% pay increases. The pay increases come ahead of the National Living Wage requirement, which comes into effect in April. It will mean a further 3% increase for qualifying workers.

“Total sales growth improved slightly to 6.3% from 6.1% in the first quarter but the operating margin was lower than we expected at 6.3% for first half,” said Investec analysts Alex Paterson and Alistair Ross.

“We adjust our forecasts, raising sales, but cutting margin. In line with this, we trim our target price to 760p and retain our ‘add’.”

The analysts added that Wetherspoon had continued to do the “right thing” by maximising customer service levels and long-term profitability.

Investec raised its LFL sales forecast from an increase of 1.9% to a rise of 3% for full year 2016.

“Real disposable income is also rising and consumer expenditure may also improve on the increase in the National Living Wage,” the analysts said.

“We trim our operating margin forecast by 30bps from 6.9% to 6.6% which results in a 4% reduction to earnings before interest and tax.”

Broker Peel Hunt has added WH Smith to the 'buy' list and also lifted its target price after the company reported positive sales figures on Wednesday

Peel Hunt said its target price was now 1,800p from a previous 1,680p.

"A very pleasant surprise from WH Smith. Like-for-like trading on the High Street is in positive territory for the first time in at least a decade, and Travel retains its momentum: there's a decent upgrade here and with a demerger a distinct possibility, the shares are cheap," the broker said.

"The High Street was buoyed by strong demand for adult colouring, which remains extremely popular, but WH Smith executed its promotions well too and demand for TV listings mags helped the news and impulse category."

Peel Hunt said it was adding a further $2m to first half expectations for Smith's High Street operations as cost savings came through as forecast, and was adding another £1m to the full year as it expects continued momentum.

Credit Suisse initiated coverage of Shawbrook at ‘outperform’ with a 410p price target, saying the model is attractive, given that it avoids commoditised lending and is diversified across both SME and consumer lending.

The Swiss bank prefers Shawbrook to Aldermore, as its stronger capital position is a larger buffer against asset quality/regulatory risks and offers upside to returns if the company were managed to a lower minimum tier 1 common capital ratio.

CS started OneSavings Bank at ‘underperform’ with a 315p price target, saying it is too dependent on buy-to-let to achieve medium-term customer loan growth targets of around 20%.

“Implied 34% over 2014-18E annual BTL growth looks very ambitious versus growth achieved by other BTL lenders in the pre-financial crisis boom, when the overall market was growing more than twice as fast,” it said.

Credit Suisse initiated coverage of Virgin Money at ‘neutral’ with a target price of 385p. It said the bank benefits from operational leverage, but could see more upside from stronger competition measures to help challenger banks , which CS reckons is unlikely for now.

Finally, it upgraded Aldermore to ‘outperform’ from ‘neutral’, with a 265p price target.

CS said current levels appear to be pricing in pessimism, for instance on buy-to-let mortgages. Although Credit Suisse acknowledges the risks here, it noted mortgage loan book growth is now less exposed to BTL, while loan-to-value ratios are low enough to soften the impact of any potential regulatory restrictions on lending.