June 29, 2020

Is it time yet to enjoy a post-lockdown pint in a U.K. pub?

by Jharonne Martis.

Recently, many U.S. states have experienced a surge of coronavirus cases. One state in particular — Idaho — found that crowded pubs contribute more to the coronavirus spread than attending protests.  This is because consumers are removing their masks to enjoy their drinks, and that plays a huge role in the rise of cases. In addition, indoor places have limited ventilation and this also increases the health risk vs. attending an outdoor protest.  Coincidentally, British Prime Minister Boris Johnson announced that pubs in the U.K. may reopen on Saturday, July 4.

What does this all mean for this industry as economies are reopening?

Johnson’s announcement caused U.K. pub chain stocks to rally in anticipation of the reopening data, including pub owners JD Wetherspoon and City Pub Group. The rally is also apparent when looking at the “most loved” U.K. consumer cyclicals for the week starting June 22.

Below is a graph displaying U.K. equities with the highest average sentiment scores over the few days according to MarketPsych Indices. This particular index provides a more organic view of which companies are connecting emotionally with their customer base. Two pubs made the top 10 list in anticipation of the reopening, including JD Wetherspoon as a “loved” stock.

Exhibit 1: The Most Loved U.K  Consumer Cyclicals: June 22 – June 24, 2020

Source: MarketPsych App in Eikon

Consumers have been home for a long period and there is pent up demand. Still, although consumer’s enthusiasm about reopening is growing, recent news announcements around spiking cases in the U.S. may throw a damper on these pubs’ reopening. Consumers will determine for themselves when it’s safe to have a post-lockdown pint at the pub.

This sentiment is reflected in our StarMine models, which shows a sea of red among the U.K. pub scores (Exhibit 2). The bulk of these companies score in the bottom quartile for all measures related to the StarMine Value-Momentum (Val-Mo) model which looks at four components around valuation and momentum. Likewise, their weak Analyst Revisions Model (ARM) Scores suggest that analysts polled by Refinitiv are bearish on these companies, as it has become increasingly apparent that social-distancing measures are still expected to remain rigid, with standing layouts, pre-booking of tables, hand sanitizers, and, of course, no drinkers at the bar. For hygiene purposes, cash will be replaced with credit cards.

Exhibit 2: StarMine Model Scores for U.K. Pubs

Source: Eikon

The StarMine ARM model is highly predictive of both the direction of future revisions and price movement. In fact, the JD Wetherspoon ARM took a nose dive in mid-April and has declined further to a score of 21 out of a possible 100 (Exhibit 3).  This suggests that analysts are likely to revise earnings estimates downward.

Exhibit 3: JD Wetherspoon StarMine Analysts Revisions Model Score

Source: Eikon

For JD Wetherspoon, earnings for the FY period ending July 2020 are expected to decline significantly. The retailer currently has an EPS mean forecast of -1.43p a share, below last year’s 75.5p result, and has a -11.06% SmartEstimate.

The SmartEstimate is a weighted average of analyst estimates, with more weight given to more recent estimates and more accurate analysts. Our studies have shown that when the SmartEstimate differs from the consensus (I/B/E/S mean) by more than 2%, the company is likely to post subsequent earnings surprises directionally correct 70% of the time.

In this case, the SmartEstimate warns that negative surprises are in the offing from JD Wetherspoon.

Due to all these social distancing measures, pubs will not be allowed to be occupied at full capacity, while incurring higher costs related to store cleaning and checking customers’ temperatures before entering. Staff will also be limited in compliance with social distancing. As a result, the number of consumers allowed in the pubs will be constrained, and therefore also consumers’ desire to visit pubs.

Ultimately, the success of the reopening will depend on the pubs’ ability to master social distancing to diminish the further spread of the coronavirus. This will give consumers reassurance that health risks have been reduced and start feeling more confident about the economy’s reopening.

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