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WH Smith Marshalls resources

Once again, the group is planning to double the size of its international travel business with an acquisition
December 12, 2019

WH Smith (SMWH) is close to completing a $400m (£304m) deal to buy US airport and tourist resort retailer Marshall Retail Group, which will double the size of its international travel business and significantly beef up growth prospects. This comes only 11 months after the company got its first real foothold in the US with the $198m acquisition of airport electronics retailer InMotion. With integration of InMotion going well, and cost saving and expansion opportunities from Marshall, we think the case for the shares is compelling.

IC TIP: Buy at 2,388p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Strong margins

Acquisition to further boost travel business

Stripping out costs in high-street business

Latest results beat expectations

Bear points

EV/cash profits expensive against history

Difficult high-street retail environment

The Marshall acquisition is being funded with debt and a £155m placing at 2,150p. This isn't a cheap deal, with WH Smith's bid valuing Marshall at 13.7 times cash profits. However, once adjusted for expected annual savings of $11m expected by the third year of ownership, the multiple falls to 10. More importantly, Marshall looks a slick operation, with an Ebitda margin of around 15 per cent, which is slightly ahead of the wider international travel business. The retailer is also popular with its airport landlords, who hold the key to  WH Smith's international travel businesses growth and the $3.2bn US airport retail market. Marshall has been awarded about three-quarters of the store space it has competed for and has agreements in place to expand its airport retail space by 75 per cent to 2024, which is expected to drive double-digit annual sales growth.

Once completed, management will have to prove it can integrate the business into their existing operations. Encouragingly, judging by the work it has done with InMotion, this won’t be a problem. At £8m, profits from the acquisition’s first year of contribution were higher than initial expectations. What’s more, WH Smith should already know the business quite well given it has been courting Marshall's management since 2016 before private equity owner Brentwood Associates decided it was time to sell up.

Prior to the Marshall deal, the travel business was made up of 433 international stores and 589 UK stores and already makes up two-thirds of profits. Its stores, which are found in airports, railway stations and hospitals, are thriving, but the clear focus is on overseas expansion. International travel sales shot up 91 per cent in the year following the acquisition of InMotion. Constant currency like-for-like growth accounted for three percentage points of this.

The high-street business continues to look like a case of managed decline, with profits flat on the previous year as management expected. Much of the focus here is on stripping out costs – £9m last year and the same expected in the current year – but the enduring appeal of stationery products is offering a route to growth. 

Stationery products such as pens, pencils and notebooks now account for more than 60 per cent of store profits. In the last financial year, the group reported strong demand for fashion and seasonal stationery, such as back-to-school ranges. However, in-store sales are not the whole picture, with the group making a number of forays into online offerings, such as card companies Funkypigeon.com, Treeofhearts.co.uk and Dottyaboutpaper.co.uk and pen website Cultpens.com, alongside the group’s core WHSmiths website.

The high-street business saw like-for-like sales drop 2 per cent in the year, but improvements in product mix, alongside better buying and markdown management led to a 70 basis point expansion in the gross margin.

WH Smith  (SMWH)   
ORD PRICE:2,388pMARKET VALUE:£2.7bn 
TOUCH:2,386-2,390p12-MONTH HIGH:2,490pLOW:1,678p
FORWARD DIVIDEND YIELD:2.8%FORWARD PE RATIO:18 
NET ASSET VALUE:217p*NET DEBT:77% 
Year to 31 AugTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20171.2314010448.2
20181.2614510854.1
20191.4015511558.2
2020**1.5617212161.0
2021**1.7319313567.0
% change+11+12+12+10
Normal market size:1,000    
Beta:1.31    
*Includes intangible assets of £225m, or 206p a share, figures prior to Marshalls acquisition
**Peel Hunt forecasts, adjusted PTP and EPS figures