Time to revisit WH Smith, says Berenberg

WH Smith was the standout gainer on the FTSE 250 on Wednesday as Berenberg encouraged investors to "revisit the story" ahead of its trading update next week, given the company's defensive growth profile and limited exposure to cost inflation.

Berenberg said the retailer’s North American expansion story can drive shareholder returns for years to come.

The bank, which rates the stock at ‘buy’ with a 1,900p price target, said concerns about the exposure of the travel division to an economic slowdown are misplaced.

It noted that from peak to trough in North America, air passenger volumes declined 8% from 2007 to 2009. However, Berenberg said it was less concerned about the impact on WH Smith of another potential recession, given that economists forecast a far more modest recession next year. It also pointed out that leisure travel volumes are more robust than business travel, as consumers down-trade to cheaper holidays.

In addition, it noted that around a third of WH Smith’s travel stores are still located in hospitals, train stations and motorway service areas, and said the recovery in passenger volumes following the pandemic is far more meaningful.

Berenberg said its 2023 estimates only have implied like-for-like volumes at less than 90% of 2019 levels, meaning it still thinks that estimates are more likely to be beaten than missed.

Berenberg went on to highlight market share opportunity in North American air.

"Despite passenger headwinds, WH Smith grew travel EBIT by a double-digit percentage every year from 2007-10 by taking market share," it said. "While the focus of store growth has shifted from UK travel to North America, the opportunity is at least as significant, in our view."

It pointed out that the retailer currently has around 300 stores in NA, with a pipeline that will take it to over 350 by the end of 2024.

Berenberg also highlighted WH Smith’s limited exposure to cost inflation.

"WH Smith is far less exposed to the most inflationary cost areas than most of its leisure peers. Its biggest operating cost is rent, which has no direct exposure to inflation. Labour cost is increasing, but not at a materially quicker pace than over the last five years or so.

"Moreover, energy - which has been problematic for a number of companies in the sector - is paid for by the landlords. Therefore, we believe that cost inflation will be manageable, particularly given the company’s strong pricing power."

At 1115 BST, the shares were up 3.3% at 1,446.50p.