Investment Column: WH Smith delivers some welcome news
Lonmin; Sports Direct International
Friday 24 April 2009
Our view: Buy
Share price: 415p (+5p)
"A safe place to put your money," is how chief executive Kate Swann describes WH Smith. The high street arm of the business is defensive, Ms Swann says, with real growth possible in the travel side, which includes airports, train stations and motorways.
There is certainly substance in the argument: over the last year WH Smith's shares are up 7 per cent, and nearly 20 per cent in the last quarter. That's some real respite for those retail investors that have taken a hit in recent months.
Yesterday's interim results were not altogether glorious, however, with the group reporting a small drop in profits and sales. The former, argues Ms Swann, is due to exceptional items, and she adds that the second half is always more profitable anyway. She also points to the undoubtedly impressive margin growth – up 170bp year-on-year – and to the best news of all, a 17 per cent increase in the dividend.
Buyers would doubtless get a strong performer if they splash out on WH Smith, but the question is whether that's already in the price. Watchers at Numis would argue yes, pointing out that: "trading on, and targeting, 11 times 2009 earnings per share [giving a target price of 410p] we think the stock is [already] up with events."
Others argue that WH Smith's share will run higher, with some predicting a peak as high as £5, and even if the good run is coming to an end, we would still be buyers of safety. In these markets, a northerly heading share price, plus a healthy dividend, plus a decent operational performance, equals a sound investment. Buy.
Our view: Tentative buy
Share price: 1357p (+118p)
Shares in Lonmin, the world's third biggest platinum producer, were up 9.5 per cent yesterday as the group issued its second-quarter and first-half production reports. The spike in the stock had very little to do with second- quarter production falling 8 per cent on a year-on-year basis, however. Rather, shareholders had a good day after the group said that it has managed to refinance $575m of debt, most of which will mature in 2012, and should, analysts say, put to bed any fears that the group might ask investors to meet cash needs through a rights issue.
The group has something a record of being a bit hit-and-miss when it comes to targets, but despite the production drop in the second quarter, the group sought to reassure punters yesterday, saying it was on track to meet expectations for the full year. Sales, the group said, were at 45 per cent of full-year targets, which is ahead of previous estimates. All this, and with restructuring operations now completed at its two of major sites, and the company is gradually moving into buyable territory.
Experts at Cazenove said that they took some confidence that an improving trend is emerging on production and if that can be applied to costs, Lonmin will be worth backing. Having sorted out the debt, we think Lonmin is now worth a speculative punt at least. Tentative buy.
Sports Direct International
Our view: Buy
Share price: 70p (+1p)
True to form, yesterday's trading statement from the sports retailer Sports Direct International contained about as many words as founder Mike Ashley's football team, Newcastle United, have collected points this season. And that would be not many.
Aside from mentioning those obligatory "challenges" in the retail market, the statement reaffirmed the group's belief that it will hit full-year market expectations of Ebitda of £135m.
Despite the lack of detail in the update, the last three months have been profitable for shareholders with the stock up by nearly a third. While we think it is too early to suggest that the recent recovery in the stock signals the emergence of anything like green shoots, a number of analysts are sharpening their pencils to work out new targets.
Earlier this week, watchers at Citigroup upgraded the company to a "buy", explaining: "we have taken account of the recently improved trading pattern... Given its leading market position, and significantly improved earnings outlook, we believe Sports Direct should trade in line with its sector peers ... In this context, the group's 45 per cent price earnings discount to peers looks too wide."
While Mr Ashley's football interests increasingly look to be heading down at an alarming rate, Sports Direct is moving in the other direction. We do not think the road will be without bumps, but now might be a good time to get back into some of the better high-street names. Buy.
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