The point about WH Smith is that it keeps on doing what it does and has for some years, with nary a blip or profit upset. That strategy means wringing as much as it can from its mature high street network, obtaining growth mainly from opening shops in new airports overseas and using the strong cash generation to buy back shares.
The trading update over autumn and Christmas said that like-for-like sales at the travel side were up 5 per cent, with an additional contribution from the lower pound. That 5 per cent growth was a continuation of trends over the past year; WH Smith has been changing the mix of goods sold in its travel stores towards food, drink and confectionery to combat falling sales in magazines and books.
The company has struggled in the past to find new sites overseas. About 30 will open this financial year to August 31, with another 30 or 40 new sites also identified, which would suggest that growth is accelerating.
In the high street, margins improved because of stronger sales of stationery, its biggest and most profitable product category, particularly over Christmas. A 3 per cent fall in like-for-likes was better than the market had expected, given the end of the adult colouring craze that boosted sales last time. With this year’s sellers being those spoof “adult” Enid Blytons and their like, the mind boggles at what we will be buying next year. The margin gain came before the planned £10 million of cost savings on the high street this year. Meanwhile, footfall is being boosted by the introduction of in-store post offices.
The share buyback programme rattles on at about £50 million each year; WH Smith reckons to have bought back perhaps a third of its shares since this started in 2007.
The better than expected outcome meant that analysts upgraded pre-tax profits for the year by £2 million to £3 million to perhaps £139 million.
There is no doubt that macro-economic concerns will weigh on the high street, but WH Smith is well placed to weather these. The shares, up 104p at £15.84 last night, sell on about 15 times’ earnings, which is not cheap. This is a case, though, of buying at times of weakness, and the decline in the shares since the start of last year suggests that this is one of them.
My advice Buy
Why WH Smith’s strategy has been running for some time now and shows no signs of stumbling, while the shares are at a relatively low ebb
McCarthy & Stone
McCarthy & Stone is a little different from others in the housing sector because, as a builder of retirement homes, it is, by definition, more reliant on potential occupiers being able to sell in the second-hand market. This business, without the boost from Help to Buy, has been more sluggish than that for new homes. Whereas others in the sector got on track quite quickly after the referendum, McCarthy probably experienced a three-month hiatus as a consequence.
This was reflected in a 12 per cent fall in forward sales at the August financial year-end. This has since improved to a 2 per cent fall and, while there inevitably will be a greater weighting than usual towards the second half, any lost sales should be made up. The company is sticking to its forecast of 3,000 units a year by August 2019.
Equally encouragingly, detailed planned consents are coming through at almost twice the level of last year, while the average selling price continues to move ahead. The shares rose 7½p to 817½p after the reassuring statement. With the dividend yield behind those available elsewhere in the sector, there seems no reason to buy now, though.
My advice Avoid
Why Lost ground will be made up, but may take time
Clinigen
Clinigen is not an easy company for the market to get its head around. It has a capitalisation approaching £1 billion and supplies drugs for use by pharmaceuticals companies in their research and to patients. The company therefore does not run up heavy R&D costs and is cash-generative, allowing the payment of a small dividend.
The confusion comes because its five divisions overlap in places. The earnings multiple on the shares, about 20 times’, would seem to require a degree of growth and the company has done half a dozen acquisitions since its 2012 stock market debut.
The trading update for the first half to December 31 shows a 34 per cent rise in gross profits. A unspecified chunk of this will have come from currency changes and the lower pound. The front-runners were the business supplying the pharmaceuticals industry and expanding services and clients and Link, bought in October 2015. On an underlying basis, this probably raised profits by 35 per cent, about half of that coming from currency gains.
The purchase gave Clinigen a base in South Africa and Australia and the ability to expand into Africa and southeast Asia, and there is a new office in Japan, the world’s second biggest market.
The shares were floated at 164p. This column recommended them last spring at 640p; they added another 7½p to 817½p after the latest trading update. Some might take profits, but this looks like one to hold, even if the shares are not exactly cheap.
My advice Hold
Why Good record of growth, even if multiple is high
And finally . . .
SDX Energy has completed the $40 million fundraising that will pay for its purchase of the Egyptian and Moroccan assets of Circle Oil. When the company came to AIM last spring, it intended to expand in north Africa and the Circle assets are a good step towards this, the latter having got itself into trouble over debt and had its shares suspended on the junior market last summer. News of the deal somehow was leaked this month; SDX shares were ahead almost 4 per cent at 34¾p on the end of the fundraising.
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