There aren’t many things which haven’t increased in price since before the millennium. The J D Wetherspoon (LSE: JDW) share price, for example, has grown 170% since the start of 2000. It’s almost impossible to find a pint at the price of two decades ago. But one valuation hasn’t shifted. As seen in the recent bid for Morrisons, it’s the valuation of something important. I think it could matter for the Wetherspoons share price.
Morrisons bid logic
The logic behind the bid for Morrisons is fairly simple. The supermarket chain has a proven formula of shifting lots of quality products at keen prices to its customers. Due to the geographic spread of stores, in some locales customers have limited alternatives nearby. That helps give the supermarket company pricing power.
All that applies to Wetherspoons too, in my view.
But there was another major factor behind the Morrisons bid. The company owns a lot of its properties. What about Wetherspoons?
Pub portfolio
Wetherspoons owns hundreds of pubs. Just over a decade ago, 41% of Wetherspoons pubs were freeholds. By last July, that had increased to 64%. At that point, the company estimated that its freehold and long-leasehold property was worth £1.1bn. That’s only a few hundred million pounds short of its entire market cap at the moment of £1.5bn.
There’s more on the pub operator’s balance sheet than just assets, though. In January its net debt stood at £812m. Nonetheless, the company’s large portfolio of properties – many in town centre locations – could be an attractive asset for any potential bidders.
Twentieth century prices
But Wetherspoons’ property holdings merit closer scrutiny. The company’s most recent annual report also contained this intriguing line when it comes to property valuations: “The properties have not been revalued since 1999.”
In other words, the actual market value of the portfolio right now could be very different to the £1.1bn figure. Property prices in many parts of the country have shifted dramatically since 1999. Any bidder who wanted to target Wetherspoons would likely have to pay closer to 2021 prices for the company’s freehold and long leasehold pubs rather than snapping them up at 1999 prices. I think that means that, if the Morrisons bid logic was applied, it could be positive for the Wetherspoon share price.
The Wetherspoons share price
Currently, the Wetherspoons share price stands around 1,173p. That’s 14% up over the past year.
The company has added around £1bn of annual sales since the financial crisis and reckons it can add roughly the same amount over the next decade. Meanwhile, its formula is a proven profit spinner. Last year saw the company’s first annual pre-tax loss since the mid-1980s. I continue to see a strong investment case for Wetherspoons. Set against that is the risk that the company takes longer than planned to recover its former sales levels due to what it terms the government’s “ultra-cautious approach”. As the company’s latest rights issue this year showed, any need to boost liquidity also risks shareholder dilution.
The Morrisons bid has reminded me of the attractions of Wetherspoons’ successful business model and property portfolio. I am not aware of anything to suggest any bid is in the offing for Wetherspoons. But I can see its attractions for a potential buyer. That financial attractiveness could also help support the Wetherspoons share price.
