Investors seeking a resilient retailer with exciting international recovery potential should buy shares in WH Smith (SMWH).

Growth in the books, stationery and snacks seller’s travel division was interrupted by the pandemic, but Shares believes WH Smith now stands a good chance of bouncing back as earnings recover.

Indeed, the World Health Organisation is optimistic we are entering a new phase of the pandemic, driven by the highly transmissible but less lethal Omicron variant, which offers ‘plausible hope’ for stabilisation, and a powerful tailwind for WH Smith’s travel arm.

Berenberg says the retailer is ‘a great business that generates excellent returns on capital’ and should continue to replicate the strong returns delivered pre-pandemic in the future.

The broker forecasts a return to pre-tax profit to the tune of £65 million for the year to August 2022, ahead of £126 million in 2023 and £142 million in 2024, and it also believe dividends
will resume next year at 37p which puts the stock on a forward yield of 2.2%.

Highlighting a well-positioned travel business, the broker describes WH Smith’s opportunity in the US airports markets as ‘huge’ following the 2018 and 2019 acquisitions of InMotion and Marshall Retail respectively.

The company has recently won contracts to open new travel stores, and it has also expanded into selling medicines via a partnership with Well Pharmacy, the UK’s third largest pharmacy chain.

In its latest trading update (19 Jan), WH Smith flagged an expected improvement in its travel business in the coming months and forecast better cash generation.

For the 20 weeks to 15 January 2022, WH Smith’s total revenue was 85% of the same period two years earlier (before Covid struck), including 87% for the high street business, despite a negative footfall impact more recently from Omicron, and 83% for the travel arm.

During the period, WH Smith’s high street business performed well with online businesses funkypigeon.com, cultpens.com and whsmith.co.uk putting up strong showings too.

While it stressed WH Smith is a ‘happy custodian’, Berenberg said the retailer owns ‘a hidden gem’ in the fast-growing online gifting website Funky Pigeon, the UK number two after Moonpig (MOON), which if it were to be sold, is already worth ‘at least £200 million’.

It is also worth noting that WH Smith’s largest shareholder with an 11.7% stake is activist investor Causeway Capital Management. Activists typically demand change in how businesses are run yet Causeway has so far remained silent on this front.

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