WH Smith surges as Barclays recommends investors 'ignore the carpets'
Barclays upgraded its recommendation on WH Smith and lifted its target price as it sees further "big upside" for profits from the travel arm, which operates retail outlets in stations and airports.
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The bank moved to an 'overweight' rating from its previous 'equal weight' and upped the price target to 1,990p from 1,870p.
Telling investors to not fret about the fraying carpets and badly stocked shelves of its High Street division, as highlighted by the cult @WHS_Carpet twitter account, Barclays said its analysis indicates this division can contribute to continued stable cash generation thanks to gross margin gains and rent deflation, while growth from the funkypigeon.com channel will also help.
Some strong carpet in this store, including virtually unnoticeable repair work pic.twitter.com/Yqj6A1J67F
— WHS_Carpet (@WHS_Carpet) February 21, 2017
But analysts believe WH Smith's reliance on High Street will continue to fall as Travel grows, forecasting more than £100m of international revenue alone in the 2017 financial year, up from just c£10m in six years ago, driving circa £9m of EBIT and representing 6% of group profit.
"We believe that EBIT from International could double again in 4 years, helped by contract wins and gradual margin improvements after pre-opening costs fall," analysts wrote.
They said the recent contract win of 10 stores at Singapore's massive Changhi Airport, following wins in Alicante, the Middle East and Australia, illustrated that "WH Smith is a force to be reckoned with in global travel retail" and that given the current low single digit market share the group's international travel segment could potentially surpass UK travel EBIT in the very long term.
Barclays' upside case, which assumes more optimistic margin assumptions for international, implies £406m of value, 15% of the enterprise value.
Acknowledging that many investors are extremely cautious on the future of the UK high street, an absolute downside case that applies no value to high street would see fair value of 1,326p, 22% downside to the recent share price.
Britain's favourite bookseller pic.twitter.com/wvTI1tFLnq
— WHS_Carpet (@WHS_Carpet) February 15, 2017
Radiant scenes in Beeston pic.twitter.com/sKwh8bQ02J
— WHS_Carpet (@WHS_Carpet) January 13, 2017