W H Smith - every reason to be W H Smug

W H Smith: When the very successful Kate Swann moved on to SSP Group in mid-2013, the worry was whether any successor could keep the show on the road. So far, the internal appointee, Stephen Clarke, has done very well with the shares rising from the 750p ball park to nearly 1400p today. Today we had interims to 28^th February 2015, showing, on flat sales, pre-tax profits up 4% to £72m, with diluted eps up 10% to 51.7p (helped by the tax charge moving from 19% to 17%) and £55m of free cash flow. The group is almost half way through the £50m share buy back announced in October last year and has net cash of £10m. On the back of this the dividend has been raised 12% to 12.1p. At the divisional level, the Travel part (airports, stations etc.) was up 7% with the High Street up 2%. The former accounts for about 40% of profits and the latter 60%. The long-term trends remain in place with High Street LFL sales down 4% and Travel LFL sales up 3%, with an extra 4 points of expansion growth (both domestic and international) on top. Whilst Travel is all about growth, High Street is all about squeezing costs relentlessly, with the division on course for a significant £11m of savings this year, and always trying to improve margins through mix changes.

Looking ahead seems to be a case of more of the same. Travel is being expanded, whilst the High Street decline is being softened, including adding Post Office counters and experimenting with a W H Smith Local franchising format. The growth in international travel is a long-term trend to exploit and W H Smith seem to be executing this well. At the same time the efforts to avoid the High Street division going the way other yesteryear brands like Woolworths seem still to be working. The rub though is the valuation. For FY2015, 86p of eps would be a PE of 16.1x for high single digit eps growth. This doesn’t offer much, if any, discount to the sector. A full year 12% dividend hike would take us to 39.2p and a modest yield of 2.8%. With the shares brushing 1400p, they can only be a hold, whilst waiting for a better entry point. (Neil Cumming^, 16^th April 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower