Its management of the pandemic has been exemplary: costs have been cut and in some months its cash has been depleted by just £5m-£10m – tiny sums by comparison with its available resources of £400m. The group should be able to break even on a cash basis with just 50pc of its normal customer traffic, far less than other retailers.
It has closed a few of its high street shops, but even here it is better placed than most thanks to its connection with the Post Office.
It invests next to nothing in the high street chain, which instead is a source of cash for building and improving the travel arm. The latter does not require too much in the way of capital, however, and this, in combination with those margins, allows the business to make healthy returns on capital in the mid-20s per cent in normal times. Cash conversion is typically between 80pc and 90pc.
Questor puts much of this success down to the firm’s strong culture, an attribute whose importance we discussed here two weeks ago. It has had a succession of strong chief executives who have been promoted from within after they have got to know the business thoroughly.
“They have come up through the business so they know the strategy and are great executors of that strategy once they get the top job,” said Georgina Cooper, who holds a stake in her Dunedin Income Growth investment trust. “Not all management teams can do that. WH Smith is not your average legacy retailer.”
The shares trade at about 15 times the earnings that the firm is expected to make once things return to normal in two or three years’ time. This looks good value for a business that should come out of this crisis in better shape and is able to grow profits strongly.
Questor says: buy
Ticker: SMWH
Share price at close: £13.53
