WH Smith's earnings soar on travel recovery

WH Smith (SMWH) bumped up its dividend after its pre-tax profits surged by three-quarters, as the retailer reaped the benefits of the resurgence in travel demand. Recent updates from the airlines have highlighted the travel recovery - Wizz Air (WIZZ) flagged record passenger numbers on the same day as these results – so it isn’t surprising that the company is gaining from the same trend given its presence in airports and railway stations.

Travel revenues boomed by 43 per cent to over £1.3bn as recovering air passenger numbers meant more consumers popped into the company’s airport stores. While the UK division's growth rate bettered that for the US, the company’s bullishness on growing its North American market share to 20 per cent (from the current position of 13 per cent) over the next 5 years is a key thing to watch. 

On the other hand, high street revenues were down 1 per cent to £469mn after 13 stores were closed in the year. This mature part of the business is very much in the shadows of its travel cousin. 

Management plans to invest around £140mn of capex in 2024 to “drive further growth”. Investment is made easier by improving leverage, which the company expects to fall from 1.4 times at the year-end to within its target range of 0.75-1.25 times by the end of 2024, and strong cash generation. Operating cash flow rose from £155mn to £235mn year-on-year.

Post-period travel trading is undoubtedly encouraging. In the 9 weeks to 4 November, UK revenues were up 13 per cent, while North America and other international markets posted growth of 15 per cent and 27 per cent respectively on a constant currency basis. 

Analysts at Panmure Gordon raised their target price from 2,100p to 2,300p and reiterated that the company is one of their “top picks” given the US market opportunity.

With an undemanding valuation of 13 times forward consensus earnings, we take a punt. Buy.

Last IC view: Hold, 1,596p, 20 Apr 2023