WH Smith Plc - Shown a sign of recovery in several markets

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

On 12 November 2020, the Company will announce the preliminary results.

Rationale for Valuation – Buy at GBX 977

• The UK retail returned to growth in June 2020, driven by online sales, which were three times the yearly average and the momentum is expected to continue.
• Across the air and rail channels, WH Smith has begun a phased reopening of the UK stores.
• In H1 FY17 to H1 FY20, the Company has shown decent fundamental metrics as it has maintained a return on equity (ROE) above 15% for the last three years.
• From the technical standpoint, 90-day RSI stood at 45.44, which is supporting the upside movement.

Key Risks

• The next wave of COVID-19 outbreak could again drag down demand for non-essentials. Also, it can disrupt the supply chain of retailers as well.
• WH Smith is facing a significant financial impact due to stores closure with coronavirus led restriction.
• Heightened online penetration may lead to increase price competition among the retailers, and it would have an impact on the retailer’s margin in long-run.

Recent News

On 9 September 2020, the Company announced the appointment of Nicky Dulieu as a Non-Executive Director, and the retirement of Suzanne Baxter (as a Non-Executive Director).

Trading Update (as on 5 August 2020)

• The Company has seen a gradual recovery as lockdown restrictions have eased around the world, but sales continue to be materially down against the previous year.
• It has open 53% of the UK Travel store estate and remain focused on surging average transaction value.
• SMWH expect a faster recovery in the US versus the rest of the world.
• Moreover, it has accelerated the integration of the InMotion head office into MRG (Marshall Retail Group Holding Company, Inc.).
• The Company witnessed a strong performance in the online business. It also enhanced the redundancy policy.
• According to the liquidity position, the Company had cash of approximately £63 million as at 4 August 2020, with an additional committed bank facility of £120 million and a revolving credit facility of £200 million.

One Year Share Price Chart

Daily Chart as of 21 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

For the financial year ending 31 August 2020, WH Smith expects a headline loss before tax to be in the rage of £70-£75 million. Further, the Company has shown an early sign of recovery in the Travel business. Looking ahead, the Company is well-placed for the long term and shall continue to grow the share in the international travel retail market. The Board believes that it is well-positioned to benefit in due course from the recovery of the key markets. The stock made a 52-week low and high of GBX 584.04 and GBX 2,660.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on WH Smith at the current market price of GBX 977.00 (as on 21 September 2020 before the market close at GMT 11:18 AM), with lower double-digit upside potential based on 2.00x EV/NTM Sales (approx.) on FY20E sales (approx.).

On The Beach Group Plc – Expects a strong position for the future

FTSE All-Share listed On the Beach Group Plc (LON: OTB) is a UK-based online travel agent, which offers a range of hospitality products.

Rationale for Valuation – Buy at GBX 236.20

• The Company has decent fundamental metrics as it has maintained a Gross margin above 60% for the last two years.
• In the last six months, the Company has delivered a return of ~60%, which was higher as compared to the FTSE All-Share Index.
• The management believes that the Company’s asset-light business model, alongside Trust account protection for customers, places OTB in a strong position for the future.
• From the technical standpoint, 90-day RSI stood at 43.91, which is supporting the upside movement.

Key Risks

• The prolonged closure of airspace due to Covid-19 can lead to a liquidity crisis. Moreover, it could put further pressure on the revenue and profitability in the near term.
• Also, the inability to deal with technological changes and competition can impact the long-term sustainability of the business.
• Environment and sustainability issues could also affect the revenue and profitability of the Company.

Financial Highlights (for the six months ended 31 March 2020, as on 30 June 2020)

(Source: Company Website)

• The Company made excellent progress in the first four months of the financial year 2020 and achieved sales growth of approximately 30% for holidays departing in Summer 2020 and record levels of brand awareness.
• In H1 FY20, the Company’s adjusted revenue declined by 17% year-on-year, driven by the cancellation of projects and reduction in demand because of the pandemic effect.
• On 31 May 2020, the Group’s cash position stood at £50.5 million excluding £54.8 million of customer monies held in Trust and after repayment of the £30 million revolving credit facility (RCF).

One Year Share Price Chart

 Daily Chart as of 21 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

For Summer 2021, the Booking volumes remained low but are significantly ahead of the previous year. Meanwhile, the Company witnessed a significant increase in demand from mid-June 2020. The management believes the business is well-placed to grow market share as demand for holidays recovers.  Moreover, future growth looks promising as the Group is one of the strongest players in the tour & travel business. Overall, the Group is in a stronger position and will continue to be progressing towards the long-term vision of becoming Europe’s leading online retailer of beach holidays. The stock made a 52-week low and high of GBX 112.60 and GBX 500.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on On The Beach Group at the current market price of GBX 236.20 (as on 21 September 2020 before the market close at GMT 12:34 PM), with lower double-digit upside potential based on 6.70x EV/NTM Sales (approx.) on FY20E sales (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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