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WH Smith shares ahead of events

With the newsagent still hostage to ongoing events, talk of 'recovery' looks premature
November 12, 2020
  • Newsagent faces £20m of cash burn in November
  • Full-year results predictably deep in the red
IC TIP: Sell at 1,463p

‘Recovery’, as it’s probably evident to readers by now, is a complicated term. Putting on a brave face, WH Smith (SMWH) used the word (or a version thereof) 44 times in its loss-making accounts for the year to August. But reassuring words, even next to a recent share price rally, does not a business resurgence make.

For one, talk of recovery is always relative. The newsagent’s statement that its North American travel division has seen “encouraging signs of recovery”, for example, should be set against comments from Garry Kelly, chief executive of US domestic carrier Southwest Airlines (US:LUV), who this week said passenger numbers are still down 70 per cent. Better than nothing can still be closer to nothing.

A faltering rebound in travel also meant group revenues were at best 31 per cent lower year on year ahead of a second UK lockdown. Its arrival shows recoveries can end fast.

And while being “well positioned for the recovery” is not an unreasonable claim, the definite article is not supported by specifics crucial for investor confidence. With cash burn set to hit £20m in November alone, that matters. Consensus forecasts for a loss of 15.3p per share in the current year, followed by earnings of just 56.9p in FY2022, add to the doubts.

WH Smith is clearly doing the best it can, but by (understandably) focusing on smarter physical locations over an expanded digital offering in recent years, it is unlikely to lead any eventual retail sector rebound. As such, the share price – up 45 per cent in a month and now 6 per cent above the average broker target – looks ahead of events. Sell.

Last IC View: Hold, 889p, 15 May 2020

WH SMITH (SMWH)   
ORD PRICE:1,463pMARKET VALUE:£1.9bn
TOUCH:1,462-1,466p12-MONTH HIGH:2,660pLOW: 584p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:170p*NET DEBT:£851m
Year to 31 AugTurnover (£bn)   Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20161.2113195.643.9
20171.23140105.048.2
20181.2613499.154.1
20191.4013598.158.2
20201.02-280-199nil
% change-27---
Ex-div:na   
Payment:na   
*Includes intangible assets of £493m, or 377p a share