Thursday newspaper share tips: Tough year ahead for JD Wetherspoon

JD Wetherspoon is facing a number of challenges, which has prompted The Telegraph’s Questor to rate the company at ‘sell’.

The hospitality business said like-for-like sales improved in the first 12 weeks of the second quarter but that operating margins would be 1.1% lower than the same period last year due to increased labour costs.

But chairman Tim Martin warned that his current view was that profits for this year were "likely to be towards the lower end of analysts' expectations".

The consensus had stood at £69m-£78m, according to Bloomberg research.

Questor highlighted the main problem in the short term is the steadily rising wage bill, which makes up a third of its operating costs.

However, with the National Living Wage set to begin in April, it is set to rise again.

“JD Wetherspoon has already started pushing up wages ahead of the April increase, with a 5pc rise in October 2014 and a further 8pc in July 2015,” Questor noted.

On top of that, the company has committed to freezing prices of food and drinks which has hit its operating profit margin.

Questor also said with more competitors on the high street and better offers for customers, the company is slowing its expansion plans with only 10 new pubs set to open this year, down from 30 in 2015.

Nonetheless, with profits falling and costs rising, the column said it is “almost impossible” to justify its rating of 16 times forecast earnings.

With the rest of 2016 looking more difficult, Questor rated the shares at ‘sell’.

Over in the Financial Times, Lex pored over Royal Dutch Shell’s trading update from Wednesday which highlighted up to 10,000 job cuts to streamline the combined Shell-BG Group.

The company also said capital investment last year is expected to be 20% lower at $29bn as a result of efficiency improvements and more selectivity on new investments.

Capital investment for Shell and BG combined in 2016 is currently expected to be $33bn, around a 45% reduction from combined spending.

The paper wondered whether the BG deal is still a good idea considering the recent plunge in oil prices.

“It would be natural to think, given that the oil price has halved since it was announced in April, that the BG deal must, by now, be grossly overpriced,” Lex said.

“It probably is overpriced – it looked that was when it was announced – but probably not grossly so.”

It noted that shareholders of BG Group get a chunk of shares in Shell, and as the share price has fallen that will have brought down the value paid for the company.

Lex also believed Shell doesn’t need to cut its dividend in the immediate short-term, but in the longer-term it might be worth disappointing income investors “to make it clear to the market that owning an oil company for its steady cash flows is an absurd idea.”