Barclays Capital gave a lift to books and newspapers retailer WH Smith Group PLC (LON:SMWH), upgrading its stance to ‘overweight’ from ‘equal-weight’ with an increased target price of 1,990p on hopes for its International Travel division.
In mid-morning trading, WH Smith shares were topping the FTSE 250 leader board, up 4.5%, or 77p to 1,775p.
In a note headlined ‘Don't fret about carpets, International Travel is the big upside’, Barclays analysts referred to a Twitter handle called @WHS_Carpet, which includes pictures of poorly repaired carpets and badly stocked shelves in WH Smith shops.
They said: “We see this criticism as similar to that of many investors who assume the shares will collapse when the high street 'goes wrong'.”
But, the analysts added: “Our analysis indicates that stable cash generation from High Street is sustainable, driven by gross margin gains, but also through other areas such as rent deflation, and growth in funkypigeon.com.
“In addition, we believe that the reliance on High Street will continue to fall as Travel grows.”
International rescue …
They expect WH Smith to report over £100mln of International revenues in full-year 2017, up from just around £10mln in full-year 2011, which should drive around 6% of group profit.
The analysts said: “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.”
They pointed out that a recent contract win of 10 stores at Changhi Airport in Singapore - the 16th busiest airport in the world - is another example illustrating that WH Smith is a force to be reckoned with in global travel retail.
The analysts concluded that given its current low single digit market share, EBIT from WH Smith’s International Travel business could potentially surpass that from UK Travel in the very long term, thus they believe a re-rating of the stock is warranted.
A number of brokers have upgraded their ratings for WH Smith over the past few months citing the potential for growth in its Travel business, with Investec Securities hiking its stance to 'buy' from 'hold' around a week ago.