To some, it may look like its high street rivals Rymans and Waterstones, but to investors WH Smith has more in common with airline operators such as easyJet. Like many a retail chain, the stationer and bookseller is having to contend with faltering supplies and rising inflation, but its share price has been held back not by these pressures so much as international travel restrictions and a Covid-driven shift to home working.
Best known, perhaps, for its tatty and chaotic high street stores, WH Smith sees its future in railway stations and airports, which accounted for two thirds of trading profits before the pandemic. This financial year the company expects to return to a “meaningful” profit, which analysts have interpreted as £68 million at a pre-tax level, preceding a return to pre-pandemic levels in 2023 and back from a loss of £116 million in the last financial year.
Hopes are pinned on a greater reopening of air travel and a return to workplaces pushing the recovery in passing custom in airports and rail stations. Revenue generated by the travel business recovered to 79 per cent of 2019 levels over the nine weeks to the end of October, compared with 39 per cent in the three months to the end of November last year. Group revenue is expected to be back at 2019 levels in the current financial year.
The chief concern for investors is whether the retailer has the cash resources to meet its rent, finance and other general operating costs until revenue recovers. Not surprisingly, underlying profits generated last year were less than the fixed costs of rent and finance charges. However, a £327 million bond issue in April and and an increase in Smith’s revolving credit facility by £50 million helped to reinforce the balance sheet. Funding firepower stands at £357 million and the group has no debt maturing until 2025.
Cash burn has come down significantly, from a monthly rate of between £25 million and £30 million as the retailer entered the pandemic to a break-even level by August this year. It has swung back to generating positive free cash, although meagre at £14 million, compared with the previous year’s outflow.
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On the cost side, renegotiating leases has helped to cut the rent bill, last year saving an average 50 per cent on those agreed. It has 400 leases up for renewal over the next three years and is in discussions over about 100, so expect rent costs to come down further.
Net debt is expected to creep up from £291 million at the end of August to £310 million the same time next year as a recovery in cashflow is countered by rising capital expenditure, which is expected to be about £100 million. That money will be spent on expanding the shop footprint in Britain and overseas. At the end of October, the group had 100 stores in stations that are yet to open.
Expanding the store footprint while customer numbers remain subdued might be jarring for some critics, but WH Smith’s strategy had won plaudits from the market — the shares were at a record peak just before the pandemic. Yet that expansion also should temper expectations for a return to the sort of dividend that the formerly highly cash-generative business used to pay. For the present financial year, a payment of 20.24p is forecast by analysts and even by 2024 the dividend is expected to be some way below the 2019 level.
Most travel stocks trade at bargain basement prices, but, at just under 21 times forecast earnings for the 2023 financial year, WH Smith shares don’t fit that bill. With less exposure to international traveller volumes, the recovery in the group’s profitability is less uncertain. But it also doesn’t represent great value.
ADVICE Hold
WHY The shares have already been priced fully for a recovery in earnings
Urban Logistics Reit
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If the supply chain disruption plaguing multiple industries convinces manufacturers to locate their operations closer to home, industrial landlords could find their space in even greater demand. Richard Moffitt, chief executive of Urban Logistics, certainly thinks so, although the industrial real estate investment trust is hardly in need of stimulants.
Like its London-listed peers Segro and LondonMetric, Urban Logistics has enjoyed an aggressive rise as the supply of land for development remains tight and demand from ecommerce continues to rise. During the first half of the year, its portfolio grew by just over 11 per cent on an underlying basis, while new lettings and renewals boosted underlying rent by 30 per cent. That has backed a generous dividend, forecast to be 7.6p this year, equating to a potential dividend yield of 4.3 per cent at the present share price.
Urban Logistics is focused on “last mile delivery”, with 60 per cent of its warehouses in England’s southeast and Midlands. Assets are single-let, the idea being that less cash is leaked through single tenant vacancies.
That’s just as well, because rising asset values also mean that it needs to generate greater rental growth to justify the price it pays to acquire sites. The group, which has Nigel Rich, a former Segro chairman, as its non-executive chairman, sources 95 per cent of its deals off-market.
The group is buying new acquisitions at a pace, funded by tapping the market for cash. It had identified a pipeline of £400 million of potential purchases, so shareholders should expect more fundraising soon.
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There are plans to upgrade from Aim, London’s junior stock market, and join the main market next month, which would bring greater access to a wider range of shareholders and could propel the shares higher.
You can forget getting access to pure-play logistics property at a discount, or even in line, with a real estate investment trust’s net asset value. At 176p, the shares are at a 5 per cent premium to NAV forecast at the end of March next year, slimmer than LondonMetric and Segro. Smaller scale plays a part, but that looks attractive, nevertheless.
ADVICE Buy
WHY Rising rental income and strong collections bode well
