The transition by WH Smith (SMWH) into a retailer focused on travel sites such as airports, hospitals and train stations both in the UK and globally is having some success. At home, its UK travel business grew revenue by 12 per cent and trading profit by 25 per cent. Compare this with a high-street business where revenue fell by 4 per cent and profit dropped by 9 per cent, and you can see the logic. 

The high-street business now makes up just 24 per cent of sales and 15 per cent of group trading profit, and the company is keeping a tight rein on costs. It is renegotiating rents as leases fall due and only renewing where it sees value, closing 14 stores last year. Of the remaining 500, all-but 30 have leases expiring within three years. Rent savings of 35 per cent helped to drive £16mn of costs out, with a further £11mn expected this year. 

Globally, the travel arm grew revenue by 11 per cent last year, and trading profit rose by more than a fifth. The group’s adjusted pre-tax profit rose by 18 per cent to £161mn, but the reported figure was weighed down by £55mn of one-offs, including £30mn of asset impairments.

Despite its progress, WH Smith’s share price has been treading water – down 3 per cent this year. Investors remain concerned about its debt, which looks eye-watering at £997mn including leases, but less frightening at £371mn (or 1.4 times adjusted cash profit) if omitted. 

Management expects net debt to fall to £340mn this year. This, and the improvements under way, mean we think a valuation of 13 times forecast earnings remains a reasonable price to pay. Buy.

Last IC view: Buy, 1,186p, 25 Apr 2024