Investment Column: WH Smith looks good for canny shoppers

Cookson; System C Healthcare


Our view: Buy

Share price: 482.3p (+1.5p)

WH Smith, the book and stationery chain, wrapped up the Christmas-trading statements of listed retailers yesterday and, unlike some of its rivals such as HMV Group, it did not disappoint. The retailer refused to blame the dire weather last month, although this will have contributed to group underlying sales falling by 5 per cent for the 21 weeks to 22 January.

More importantly, gross margins were ahead of expectations with costs "tightly managed" to combat the tough trading conditions. It has been a familiar story for the more-than seven-year tenure of Kate Swann, WH Smith's highly regarded chief executive. She has relentlessly reshaped its offer away from low-margin entertainment products, such as DVDs and computer games, to higher-margin books and stationery. This strategy has consistently delivered profit and dividend growth.

While like-for-like sales at its high-street shops fell by 6 per cent during the most recent 21 weeks, they were down by only 3 per cent when entertainment-product sales are stripped out. Its travel division's underlying sales also fell by only 3 per cent. More importantly, the City expects its travel business, which accounted for more than half of group profits last year, to continue growing more quickly than its high-street operation.

WH Smith yesterday reaffirmed its commitment to a £50m share buy back, which it unveiled in October. It has now bought back more than a third of the amount so far. Another tonic is that the shares still trade on a modest forward earnings ratio of only 10.2. For these reasons, we think WH Smith's shares still have legs, despite rebounding strongly since August.

Of course, like other retailers, it faces a tough year on the high street and is firmly in the line of sight of the supermarkets and Amazon. But it remains a decent bet.

Cookson

Our view: Buy

Share price: 680.5p (+48p)

The rebound in the world's steel and electronics markets bodes well for Cookson, the industrial materials group which issued an update yesterday. Underpinned by an increase in its markets, the company said it expected "performance in 2011 to be well ahead of 2010", attracting a round of positive broker commentary.

Yet, that is only half the story, as the group also unveiled new strategic targets, eyeing strong growth in the years ahead. For the years to December 2013, the company said it was aiming to book average annual revenue growth of more than 1.5 times the pace of expansion in the global economy. It is also eyeing an average of double-digit growth in headline earnings, and aiming to keep dividend growth "at least in line with earnings growth".

The prevailing strength and punchy targets promise to underpin gains in Cookson's shares, which also boast an undemanding rating. In fact, they are positively cheap, trading on multiples of less than 10 times forecast earnings for this year, according to Evolution. All the while, they offer a forecast yield of more than 3 per cent. The market is being far too bearish, in our view, overlooking a business that offers an enviable exposure to the rebound in the global manufacturing and industrial sectors. Buy.

System C Healthcare

Our view: Buy

Share price: 45p (+0.5p)

There has been good news and bad news over the past year for System C, which offers IT systems and services to help to rationalise hospital records. The good news for the company was the procurement process for NHS contracts opened up. The bad news, was the Government has slashed spending and been winding up the National Programme for IT, hitting the company's service revenues in the first half of the financial year. That and spending cuts led to revenues falling 27 per cent to £13.3m, and a slight loss following £3.2m profit a year earlier.

The company has been shifting from a services-dominated business to more of its own software. The pipeline looks healthy for System C's flagship product, Medway, and it is in negotiations with 33 trusts. The main problem is the revenues could take a while to flow through to the company and there remains huge uncertainty over the sector following the Government's spending cuts.

Yet, the company has cash on the balance sheet and its enterprise value is 5.2 times earnings before interest, taxation, depreciation and amortisation, according to Daniel Stewart. There should be some upside. Buy

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