Growth catalysts still in place for WH Smith

UK retailers are struggling to cope with weak consumer demand due to rising inflation and stagnant wage growth, alongside increasing sector disruption from online offerings such as Amazon. It's why those looking away from the high street are benefiting most right now.

One of those companies is WH Smith. Long a staple in town centres and shopping centres across the country, more recently it's been the firm's travel division, both in the UK and abroad, that's been driving growth.

A short but sweet trading update, published ahead of full-year results for the year ending 31 August due on 12 October, barely moved the share price dial Wednesday, but the company still piqued our interest, with clear opportunity for further growth.

Crucially, the high street chain is doing no worse than expected, we're told, and cost cuts and margin improvements have matched expectations. And at the more exciting travel division, there’s been a “strong” performance and “good sales”. As such, full-year results should hit targets.

It's something broker Investec has picked up on, too. It's long been a fan and upgraded its price target by 11% following June's third-quarter update to 2,100p. That implies upside of 13%, and it's the travel side of the business that's generating interest.

While Smith's high-street stores struggle, those based at train stations, airports and motorway services flourish.

Revenue from the town stores fell by 4% during the first half of the year, with trading profit there flat year-on-year at £53 million. Smiths is doing its best to stem declines, though, through cost savings and margin improvements.

Travel shops offset that weakness, ramping up sales by 10% at the half-way stage of the financial year to give overall group revenue up 2%. The company said today it continues to see "further opportunities in the international news, books and convenience travel market".

For Investec, too, it's the travel division that captures the imagination. Travel accounted for 58% of trading profit in 2016, up from 51% four years earlier. In five years' time, Investec analyst Kate Calvert reckons that will have grown to around 70%, and it's that which should support a higher valuation multiple in future.

A forward price/earnings (PE) ratio for calendar year 2018 of 16 times is "undemanding", according to Calvert, given the business is capable of delivering mid-teens total shareholder return and yields 3%. "Very reasonable", adds RBC's Richard Chamberlain who values the shares at 2,000p.

Even those less enthused by Smith's prospects like Cantor Fitzgerald's Mark Photiades see clear opportunities for long-term growth in international travel, though there are risks.

Putting aside concerns around the UK consumer, any reduction in air travel would hit revenues. Terror attacks hurt airline stocks, while the implications of Brexit on flights between the UK and the EU is still unknown. The euro's strength against sterling is also a concern, but Chamberlain expects demand for travel to "remain robust".

Smiths remains sufficiently well positioned at both train stations and motorway service stations to benefit from any rise in staycations, while its presence at international airports is burgeoning, with Italy being its most recent foray overseas.

After a period of underperformance in the aftermath of the Brexit vote, Smiths shares are back near record highs. They've struggled in the past to make a convincing move toward £19, but there has been progress and good cash generation. Lots to like here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.