JD Wetherspoon (LON:JDW) is the pick of the quoted managed pubs groups, according to Royal Bank of Scotland, which has buy recommendations on four of the five stocks in the sector.
The only one which failed to move the needle was Greene King (LON:GNK), which is rated as ‘hold’ with a 480 pence price target.
“Our lukewarm recommendation reflects uncertainty about the recent acquisitions and the risks related to potential future acquisitions,” said a research note from the RBS pubs team.
“We prefer to wait and examine the size, price and profile of potential future acquisitions as they happen.”
RBS points out that a “frenzy of corporate activity” and cash returns to shareholders between 2000 and 2007 resulted in many pub-owning companies carrying excessive debt into the recession.
Fund raisings, more judicious investment and the mass disposal of poorly performing pubs have combined to lower leverage ratios to “more reasonable levels over the last two years”, the broker added.
“Returns on investment appear to have troughed, although there is a wide range in performance across the peer group,” it told clients.
“Only one company, JD Wetherspoon, reined in capex ahead of the tough trading period and now provides the highest investment returns among our coverage on our analysis.”
Valuing JD Wetherspoon shares at 600 pence each (current price 390 pence) RBS said the company founded by Tim Martin has the highest returns in the sector and the greatest growth potential, yet one of the lowest valuation multiples.
“JD Wetherspoon's sector-leading returns exemplify its focused but long-term approach. Growth is self-funded and is accelerating as momentum from the ramped-up opening programme builds,” the bank added.
“The balance sheet is robust and there may even be scope for modest share buybacks, in our view.”
In fact the outlook is far more encouraging for the sector as a whole, which might explain RBS’s upbeat assessment of the pub groups it covers.
Alongside JDW on the RBS ‘buy list’ are Marstons (LON:MARS) with a 135 pence a share price target, Mitchells & Bulters (MAB) - price target 500 pence - and the Spirit Pub Company (LON:SPRT), with a valuation of 75 pence.
Its valuation of MAB is more than double the 230 pence that billionaire Joe Lewis is reportedly willing to offer for the company.
“Mitchells & Butlers' problems continue, this time from a 230p indicative offer that we find opportunistic and believe materially undervalues the company,” RBS said.
“However, a more appropriate valuation may be realised only if more than 25 per cent of the shareholders stand firm for a protracted period, a situation few may relish.”
It reckons Marston's valuation multiples will rise to reflect the consistent delivery of its clear strategy.
The balance sheet is almost repaired and returns momentum is building gradually.
Trading appears resilient and growth plans sustainable, and we believe investment returns are improving, RBS adds.
Spirit, meanwhile, is predicted to post “double-digit investment-led growth” from the underinvested managed pub estate.
“Our estimates assume Spirit to significantly narrow the trading gap with the managed pub, food-oriented peer group, but this is not without execution risk,” RBS said.