Goldman Sachs starts WHSmith at ‘buy’

Goldman Sachs initiated coverage of WHSmith at ‘buy’ with a 1,500 price target as it said the stock offers industry-leading returns at a discount.

"Our positive view is based on a gradual improvement in traffic (across air, rail and UK high street) and a constructive long-term view on profitability, resulting in a strong returns forecast versus peers, which we reflect in our multiples-based valuation framework," it said.

Goldman expects travel sales growth to outpace High Street sales growth and anticipates a circa 10 percentage point top-line substitution over the next four years. "Hence we expect a shift away from a competitive high street towards a more captive customer in travel, driving long-term upside to already best-in-class profitability," it said.

The bank said that on its estimates, these returns are not captured in current valuations.

In the near term, Goldman reckons the company is close to the bottom of its earnings revision cycle post the Covid impact, and said it sees potential consensus upgrades as a positive catalyst for the share price.

"Our upside versus consensus is mostly due to our view on margins, which we see as supported by: (1) an improving product category mix driving upside to gross profit margins across both travel and High Street; and (2) a reduction in rental costs on the High Street given lower footfall - both of which we estimate could add up to 130 basis points of EBIT margin upside over a four-year period."

At 0805 BST, the shares were up 2.2% at 1,066p.