Investec retail stock analyst’s note: WH Smith is building momentum – buy

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Retail Times has teamed up with Investec to publish analysts’ notes on leading retail stocks. Today, Investec Securities analyst, Kate Calvert, suggests WH Smith is building momentum and recommends “buy”

 

Smith WH (SMWH.L)

 

Price: 1122p | Target: 1400p | Rec: Buy

WH Smith’s FY14 pre-close statement expects numbers for FY14 to be in line with current market expectations. Most interestingly, we understand LFLs within Travel have improved and could be positive for the first time since 2008. High Street continues to benefit from management’s ability to deliver cost efficiencies and improvements in gross margins. The shares trade at a c. 20% discount to the retail sector and are attractive as a more defensive play with a strong management focused on creating shareholder value. Buy.

  • Positive Travel LFL and forecasts underpinned. FY14’s pre-close statement reflects further profit growth within the High Street (c. -5% LFL for FY14 on our forecasts) and encouraging signs in Travel, which we understand has delivered positive LFL for the first time since 2008. We believe gross margins have benefitted from management’s ability to further evolve the mix in both businesses, e.g. stationery & confectionary and our high-end FY14E PBT forecast of £114m appears firmly underpinned (consensus: £113m).
  • Momentum building heading into FY15E. A shift towards positive LFL within Travel is encouraging. Signs of a cyclical recovery in UK air passenger numbers (c.15% below peak) and International building critical mass (118 of 701 travel units are international) offers upside. In addition, ‘Food to go’ trials and development of a portfolio of retail/food formats should be incremental.
  • Further High Street opportunities. We expect management at the prelims on 16 October to be upbeat on gross margin potential, further opportunities to improve the cost base as well as its online card business Funkypigeon.
  • Valuation does not reflect cash generation – BUY. We expect WH Smith to generate c. £100m p.a. surplus cash (pre-dividend & buyback), which along with its potential to deliver high single/low double-digit EPS growth is not reflected in the shares’ valuation. Our target price is based on a sector average rating (CY15 EV/EBITDA of 10x).