Cannacord keeps WH Smith at 'hold' despite prodigious cash generation

Canaccord Genuity stuck to its ‘hold’ recommendation and 1,695p target price on WH Smith despite what it described as a “solid” third quarter trading update from the speciality retailer.

WH Smith´s sales rose by 2% during the third quarter of its fiscal year, alongside flat like-for-likes, the company said in a statement.

The star performer was the firm´s Travel segment, which reported a 3% increase in like-for-like sales and a headline increase of 9%.

Gross margins in-line with plan implied about 40 basis points of improvement for the full-year as a whole, analyst David Jeary said in a research note sent to clients.

On the High Street, the firm was still grinding it out, Jeary said, with like-for-likes down by 3%.

However, full-year gross margins were expected to grow by 110 basis points.

The final quarter of the year on the other hand would see the company trade against last year´s “50 Shades” and the Harper Lee publications, with no comparables titles this year, he pointed out.

Notwithstanding the firm´s “prodigious” cash generation, the shares were changing hands at a price-to-earnings multiple of 17.8 for 2016 and 16.5 for 2015, for an approximately 20% premium against the sector.

According to Jeary, it was a similar story in terms of the company´s enterprise value-to-earnings before interest, taxes, depreciation and amortisation, which stood at 11.7 and 11.2 for this year and next.

“This looks fully priced in our view.”