WH Smith Plc – Well Positioned for Longer-Term with Successful Strategy

WH Smith Plc (LON: SMWH) is a FTSE 250 listed retail Company, which is engaged in high street retail and travel businesses.

On 22 October 2020, the Group will announce the preliminary results.

Financial Ratios


As shown in the above figures, the stores were increased year-on-year, which reflects that the Group is well-positioned from past several years. On the profitability front, WH Smith Plc’s EBITDA margin, Pre-tax margin and Net margin were higher than the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry median. In H1 FY20, ROE (Return on Equity) stood at 15.9%, which was higher as compared to the industry median of 9.6%, reflecting a good utilization of equity capital. The reported current ratio for the first half of the financial year 2020 was lower against the industry median. The Group has a robust liquidity profile to meet the short-term obligations in the near term. 

Financial Highlights (for the six months ended 29 February 2020, as on 14 May 2020)


(Source: Company Website)

Overall, the Company witnessed a good performance and well-positioned for the recovery from COVID-19 disruption. In the first half of 2020, the Group revenue increased by 7% to £747 million (H1 FY2019: £695 million), with Group LFL revenue fell 1%.  For the first half of 2020, the high Street trading profit stood at £44 million, headline profit before tax was at £80 million and statutory profit before tax was stated at £63 million.

Share Price Performance

 
1-Year Chart as on 10 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

WH Smith Plc’s shares were trading at GBX 1,003.90 on 10 July 2020 (before the market close at 9:18 AM GMT+1), up by 0.84% against the last day closing price. Stock 52 week High and Low were GBX 2,660.00 and GBX 584.04, respectively.

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology


*Peers: JD Sports Fashion Plc, Dunelm Group Plc, Next Plc, and Pets at Home Group Plc. 

Potential Risks

The Group is facing a significant financial impact due to stores closure with coronavirus led restriction. Long-term debt contribution was higher in the Group's total capital, and LT Debt/Equity ratio of the Group stood at 2.87x against the industry median of 1.23x, which poses some risks to the balance sheet of the Company.

Conclusion

In international travel, WH Smith is still operating as a small player with good growth potential. In the first half of the fiscal year 2020, the Group witnessed decent progress, with an increase in high street business and all digital channels. Looking ahead, the Company is well-positioned for the long term and continue to grow the share in the international travel retail market. The return on equity (ROE) recorded by the Group in the past several years was considerably above the peer’s average. Also, the Group has decent fundamental metrics as it has maintained an EBITDA margin above 12% for the last many years.

Based on the decent fundamental prospects and support from valuation done using the above method, we have given a “BUY” recommendation at the current market price of GBX 1,003.90 (as on 10 July 2020, before the market close at 9:18 AM GMT+1) with lower double-digit upside potential based on 1.90x EV/NTM Sales (approx.) on FY20E sales (approx.).

Vivo Energy Plc - Highly Cash Generative Business Model

Vivo Energy Plc (LON: VVO) is a FTSE 250 listed Company, which is engaged in the business of oil refining and markets under the brand of Shell to retail and commercial customers.

On 28 July 2020, the Group will announce the half-year results.

Financial Ratios



In the financial year 2019, ROE (Return on Equity) stood at 21.2%, which was higher as compared to the industry median of 11.9%, reflecting a good utilization of equity capital. Reported quick ratio for the financial year 2019 was higher against the industry median, while the current ratio was lower than the industry median. The Group has a decent liquidity profile to meet the short-term obligations in the near term.

Q1 Trading Update (for the quarter ended 31 March 2020, as on 30 April 2020)

In the first quarter of 2020, the gross cash profit increased by 6% to US$179 million (Q1 FY19: $169 million). In January and February, the Company witnessed a growth of 20% in gross cash profit, while in March 2020, the performance was impacted by COVID-19. The volumes for Q1 FY2020 surged by 7% to 2,602 million litres.

The Group had a strong liquidity position of US$1.6 billion at the end of March, with undrawn committed multi-currency revolving credit facility of US$238.0 million.

Share Price Performance

 1-Year Chart as on 10 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Vivo Energy Plc’s shares were trading at GBX 75.80 on 10 July 2020 (before the market close at 9:25 AM GMT+1), up by 0.53% against the last day closing price. Stock 52 week High and Low were GBX 137.20 and GBX 59.80, respectively.
From the technical standpoint, 90-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology
  

Potential Risks

Margins impacted in March primarily due to the reduction in demand. Long-term debt contribution was higher in the Group's total capital, and Asset/Equity ratio of the Group stood at 4.47x against the industry median of 2.83x, which poses some risks to the balance sheet of the Company. The ongoing Covid-19 mayhem may have an impact on the business growth trajectory in the near term.

Conclusion

The Group has a strong balance sheet and access to liquidity to navigate through the ongoing unprecedented crisis. The Group has a high cash generative business model, with more than 20% ROACE in last three years. Furthermore, Vivo has also built good momentum into 2020 and is excited about the remainder of the financial year. The Company has consistently delivered a ROE of above 20% over the past three years.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “BUY” recommendation at the current price of GBX 75.80 (as on 10 July 2020, before the market close at 9:25 AM GMT+1) with lower double-digit upside potential based on 15.20x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*Dividend Yield may vary as per the stock price movement.
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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