Overview

WH Smith PLC (SMWH) is a UK based company that is into the retail business. The company was incorporated in the year 1792 and is headquartered in Swindon, the United Kingdom. The company operates worldwide in the United Kingdom, the Middle East, Australia, South-East Asia and India being the major markets. The company has two core businesses being the Travel business & High Street business. The Travel business operates 867 units and offers news, books & convenience for travelling customers. It operates mainly in airports, railways stations, hospitals, workplaces and motorway service areas. The High Street business sells a variety of products which are divided into categories: Stationary, Books, and News and Impulse and few entertainment products in some stores. The Business has 607 stores across the UK. The company has 14,000 employees primarily in the UK.

Key Statistics

Key Management Team

Mr Stephen Clarke: Group Chief Executive & Executive Director

Mr Robert Moorhead: CFO, COO & Executive Director

Top 10 Shareholders

(Source: FT)

Financial Results and Review - FY2018 (£, million)

(Source: Annual Report, Company Website)

Financial Commentary – FY2018

The company reported revenue of £1,262 million for the year ending August 2018 as compared to £1,234 million in 2017 for the same period. There was an increase of 2.3 per cent in revenue, due to the steady growth of Travel Business worldwide. The company’s reported operating profit had decreased in comparison with the last year mainly due to an increase in pension service charge and unallocated costs of the company. Operating profit had been reduced from £142 million in FY2017 to £136 million in FY2018. The company’s profit/(loss) before tax decreased to £134 million in FY2018 as compared to £140 million in FY2017. The company’s profit after tax decreased to £108 million (2017: £116 million) in FY2018 due to some non-underlying items and higher tax rates. The company’s headline diluted earning per share had increased to 108.2p in FY 2018 (2017:103.6p) an increase of 4 per cent as compared to last year due to increase in profit, a lower weighted average number of shares in issue following the share buyback and increased tax rate. The company’s diluted earning per share decreased by 5 per cent to 98.2p due to some non-underlying items primarily from the high street business. The company’s basic EPS stood at 99.1p in FY18 against 104.5p reported last year.

Ratios

(Source: Thomson Reuters)
 

Ratios Commentary

Gross margin reported was 60.3 per cent in the financial year 2018, reflecting an increase of 0.9 per cent when compared with last year data. However, the reported margin was relatively higher than the industry median. EBITDA margin of 15.10 per cent for the financial year 2018 stood considerably higher than the industry median of 12.00 per cent. Net margin reported was 8.6 per cent in the financial year 2018, reflecting a decrease of 0.8 per cent when compared with last year data. Return on equity stood at 54.10 per cent which was higher than the industry median of 12.60 per cent. At liquidity front, WH Smith Plc’s current ratio was lower than the industry median of 1.15, reflecting the insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio was significantly lower as compared to the industry median, reflecting the company is less leveraged as compared to its peers.

Share Performance 

Daily price chart as on March-04-2019, before market close. (Source: Thomson Reuters)

On Mar 04, 2019, at the time of writing, WH Smith shares were trading at GBX 2,122, down by 0.18 per cent against its previous day closing price. Stock’s 52 weeks High and Low is GBX 2,154.00/GBX 1,678.00. At the closing price, the share was trading 1.30 per cent lower than its 52w High and 26.70 per cent higher than its 52w low. From the previous three months, WH Smith Plc share price was up by 11.54 per cent, and in the last one year, the stock has delivered a 7.43 per cent returns. Stock’s average traded volume for 5 days was 257,735.60; 30 days - 267,474.67 and 90 days - 364,555.91. The average traded volume for 5 days was down by 3.64 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 19.1x as   compared to the industry median of 10.8x. The company’s stock beta was 0.69, reflecting relatively lower volatility as compared to the benchmark index. Total outstanding market capitalisation was around £2.31 billion and a dividend yield of 2.54 per cent.

Valuation Methodology – 1

EV/Sales Multiple Approach (NTM)

While valuing WH Smith PLC on EV/Sales Multiple, we have considered Next Twelve Month (NTM) EV/Sales of its peers, which were Card Factory Plc (NTM EV/Sales stood at 1.98x), Next Plc (NTM EV/Sales stood at 2.01x), Boohoo Group Plc (NTM EV/Sales stood at 2.71x), and Greggs Plc (NTM EV/Sales stood at 1.82x).

Valuation Methodology – 2

EV/EBITDA Multiple Approach (NTM) (EBITDA (FY19E) approximately)

While valuing WH Smith PLC on EV/EBITDA Multiple, we have considered Next Twelve Month (NTM) EV/EBITDA of its peers, which were Next Plc (NTM EV/EBITDA stood at 9.31x), JD Sports Fashion PLC (NTM EV/EBITDA stood at 10.46x), ASOS PLC (NTM EV/EBITDA stood at 19.53x), and Dunelm Group Plc (NTM EV/EBITDA stood at 12.7x).

(Note: All forecasted figures and peers have been taken from Thomson Reuters).
 

Growth Prospects and Risks Assessments

The company’s Travel segment reported strong sales growth in both the UK and internationally with 286 units across 50 airports and 27 countries. The company will explore more opportunities to reduce cost and increase the margin for High street business. The significant risk for the company is to maintain worldwide legal and regulatory compliance. The company’s performance can be impacted by macroeconomic conditions and changes such as inflation or public spending.

Conclusion

The group has different strategies for its businesses and has cost-effective measures to reduce cost and increase its margin. The current trading levels which indicates the stock movement towards 52-week high with support coming from growth drivers like increased revenue mainly because of increased overseas sales. Based on the strong growth prospects of the company and the valuation done using the above two methods we have given a BUY recommendation with single-digit upside potential (based on 13x NTM EV/EBITDA on FY19E EBITDA and 2.1x NTM EV/Sales on FY19E sales).

*The buy recommendation is valid for the current price as covered in the report as on (4th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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