WH Smith PLC (LON:SMWH) has been given a ‘buy’ rating by Goldman Sachs on expectations of a gradual improvement in traffic at the airports, railway stations and high streets.
Analysts at the investment bank slapped a 1,500p price target on the shares, which last closed at 1,043p, as they said the company offers industry-leading returns at a discount.
READ: WH Smith launches restructuring to cut 1500 jobs
“Our positive view is based on a gradual improvement in traffic (across air, rail and UK high street) and a constructive long-term view on profitability, resulting in a strong returns forecast versus peers, which we reflect in our multiples-based valuation framework,” the analysts said in a note.
They forecast that travel sales growth will outpace sales for the retailer’s High Street arm, predicting roughly a 10 percentage point top-line substitution over the next four years.
“Hence we expect a shift away from a competitive high street towards a more captive customer in travel, driving long-term upside to already best-in-class profitability.”
With an improving product category mix driving upside to gross profit margins across both parts of the business, along with a reduction in rental costs on the high street given lower footfall, Goldman estimates these factors could combine to add up to 1.3% of EBIT margin upside over a four-year period.
WH Smith’s returns are not captured in the current market valuation, the analysts reckon, predicting the retailer will soon be able to more confidently give guidance from the effects of the COVID-19 pandemic.
The shares were up 2% to 1,066p on Wednesday morning.