HSBC takes dim view of UK pubs, downgrades Greene King and 'Spoons

HSBC, which moved Greene King to 'reduce' from 'hold' and Wetherspoons to 'hold' from 'buy', also kept Marstons and Mitchells & Butlers at 'hold' ratings as it sees limited attractions from the pub companies as they "aren’t especially cheap and they face earnings risk".

In a note to clients the bank examined how valuation support is limited and concluded that consumer weakness "may now be showing through and, combined with cost increases, this could hurt earnings for some of the operators".

With various reports suggesting a downturn may already be under way, analysts at the bank questioned pubs' claims that eating/ drinking is an “affordable treat” that would not be badly impacted in a consumer downturn.

"Maybe that’s true, though macro level data suggest that spend was hit badly during the last recession, even if like-for-likes at the big pubcos weren’t. Companies must also try to offset higher costs through higher pricing, which may be difficult," they said.

Of the four companies, only Wetherspoon's looks to have "clear pricing power" and is seen as the best placed to trade through the weakness, its strong share price performance means it’s "no longer cheap in the circumstances".

With the analysts unsure of a consumer downturn but worried about the continued increase in costs and the ease with which this can be mitigated, Greene King was downgraded on concerns over its cost outlook in particular.