Analyst at Berenberg raised their target price on retailer WH Smith from 1,500.0p to 1,750.0p on Thursday, stating it was positive on the group’s long-term prospects.
Bernberg said it continues to believe that WH Smith is “a great business”, with ample opportunities to grow, the ability to generate a good return on capital and has been well managed over a long period of time.
However, the German bank reckons that, at current levels, the valuation already appears to be pricing “a significant amount of this in” and it does not think that there is an abundance of near-term catalysts to move this forward.
“Over the last decade, WH Smith has managed to hold earnings broadly flat in High Street, despite declining like-for-like sales. However, we believe that it will struggle to achieve the same in the coming years, with gross margin improvement slowing and cost savings harder to generate,” said Berenberg, which also reiterated its ‘hold’ rating on the stock.
Berenberg added that the Covid-19 pandemic had accelerated the shift from high street to online shopping, which could add to WH Smith’s difficulties.
The analysts also highlighted that they continue to believe that the WH Smith’s Funky Pigeon online card and gifting business, held within its high street division, is an “under-appreciated asset”, with sales up 44% in the 12 months ended 31 August and underlying earnings of £12.0m.
“Even at a 10-20% discount to listed peer Moonpig, and assuming no further EBIT growth, Funky Pigeon could be worth at least £200.0m. We expect that management may begin to talk more about the progress of Funky Pigeon. We also believe that the synergies between Funky Pigeon and WH Smith are limited, and think that the company could eventually look to sell Funky Pigeon, freeing up cash to either return to shareholders or reinvest in growing its travel business.”
