Jefferies upgrades Wetherspoons, keeps Marston's at 'underperform'

JDW's recent interims flagged no dividend, a capex cut, and a cost reduction programme, Jefferies noted.

"Depending on working capital movements, we see reasonable short-term liquidity. Wetherspoon’s strong position within the UK pub sector - clear price identity, consumer traction and well-located, now largely freehold estate - should allow JDW to return to former profitability as fast as any pub operator," it said.

"We previously baulked at valuation but now see value," it added. The bank cut its price target on the shares to 1,150p from 1,590p.

Jefferies kept Marston’s at ‘underperform’ but cut the price target to 35p from 90p, while Mitchells & Butlers was maintained at ‘buy’ but the price target reduced to 400p from 530p.

As far as Marston’s is concerned, Jefferies said high leverage, zero dividends and limited growth capex is "unappealing to equity owners".

The bank said M&B remains its preferred stock. "We continue to like M&B based on the prospect of ongoing debt reduction ultimately resulting in a debt to equity value transfer, equivalent to circa 60% of the current market cap over the next three years or circa 100% over the next five years," it said.

Jefferies kept Wagamama owner Restaurant Group at ‘buy’ but slashed the price target to 80p from 170p. Prior to the Covid-19 outbreak, Jefferies expected the Wagamama acquisition to act as a re-rating catalyst, with TRG more favourably positioned for growth.

"Raising equity to accommodate a pessimistic Covid-19 scenario is sensible, in our view," it said. "The raise should reassure investors about shorter term liquidity and return the focus to medium term growth prospects."

More broadly, Jefferies said operational and financial leverage in the leisure sector was previously relatively high, based on strong cash flows.

"With the 'zero revenue' scenario barely contemplated, share prices initially fell steeply as lockdown liquidity concerns rose.

"Lockdown duration and subsequent social distancing create further uncertainty for pubs and restaurants. Fund raisings may be required, but we see longer term opportunity and some attractive valuations."