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Fundamental Analysis on WHSmith SMWH

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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Fundamental Analysis on WHSmith SMWH

#199673

Postby TheMotorcycleBoy » February 7th, 2019, 6:48 pm

Hi Folks,

I have been researching WHSmith as a potential holding to add (we don't hold it currently) and decided to run six years worth of WHSmiths' AR financial statements data into my analysis spreadsheet. I thought I'd share some of the results on TLF. First off here some of the key ratios and figures. Note where a value is assumed e.g. sales, EBIT, market cap, then the unit is £million, except EPS, DPS, FCFps which are in £. Other datas are % or straight ratios. Sorry the spreadsheet isn't that exotic....as my time isn't that plentiful!


I got the dividends from either dividendmax and for the share prices I used the approximate value at the month when the annual report figures were done for the year.

Code: Select all

     | PRICE | DIV
2019 |       |     
2018 |  2000 | 54.1
2017 |  1822 | 48.2
2016 |  1550 | 43.9
2015 |  1500 | 39.4
2014 |  1155 |   35
2013 |   830 | 30.7
   

and here's some growth figures, including PEG. You can ignore the columns, "earliest, ..., workings", they are just there to aid calcuation.


in a little while I'll try to upload some attempts at running some Share Price valuation models over the data.

Matt

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Re: Fundamental Analysis on WHSmith SMWH

#199684

Postby TheMotorcycleBoy » February 7th, 2019, 7:11 pm

This is a valuation using discounted cash flows. Sorry that the presentation is a bit iffy, it took a while just to get it like this!

I have used 2 different sources for the Free cash flow per share (FCF) figure, hence the 2 sets of valuations. The first set, where the first cash flow is £0.818 is derived from the 2018 figures using Net cash flow from operations less capital expenditure and interest paid. The second set, where the first cash flow is £0.56 is derived from the 2018 figures using Net cash flow from operations less capital expenditure and interest paid and all the other cash flows (e.g. borrowings, PPE sales and so on), except dividend payouts, included.

The initial growth figure was 5% in the first model and 20% in the second model (since those are what the spreadsheet gave elsewhere for the CAGR of FCFps across the 5 years 2013-2018 for those different sources of FCFps). After the first 3 years the model sets the FCF growth rate to 2.5% forever, more in tune with regular inflation in the UK.


Bizarrely both models calculated a very similar value for the share - about £15.35.

I used 8.35% for the discount rate.

TheMotorcycleBoy
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Re: Fundamental Analysis on WHSmith SMWH

#199688

Postby TheMotorcycleBoy » February 7th, 2019, 7:18 pm

This is the same models as in my last post, except this time I used 2.5% as the FCF from the start to perpetuity.



So now we have between £9.81 and £14.33 depending the source used for the 2018 FCFps data.

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Re: Fundamental Analysis on WHSmith SMWH

#199693

Postby TheMotorcycleBoy » February 7th, 2019, 7:40 pm

And finally for this evening, this is a calculation using Earnings power value. I added back 10% of SDA costs under the assumption that WHS are trying quite aggressively to expand abroad and hence since EPV assumes no growth, in absence of that implied investment, these monies can be added back to distributable cash profit.


I started with Net cash from operations for the above valuation, and discounting at 8.35% arrived at £14.76 per share. Note in a separate valuation I worked forward from EBIT and the resulting EPV per share was £15.90.

Article about WHS expansion plans:
https://www.telegraph.co.uk/business/20 ... es-flight/

That's all folks!

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Re: Fundamental Analysis on WHSmith SMWH

#199857

Postby dspp » February 8th, 2019, 11:11 am

That is a cracking analysis of the PL numbers.

One area you don't look at is the balance sheet. In this case, if it is to be believed, the BS appears to be under control and not hiding any nasties. Now whether any BS is to be believed is open to doubt given the propensity of finance directors to cook the books, and of auditors to skimp their checks. However at face value the BS looks to be as clean as the PL.

Then one looks at the underlying business model, and the strategic moves they are making in that. In this case treat the high street as an unloved cash cow to be run down & dumped if it does not deliver (i.e. they don't need to be a luvverly high street shop, they just need to be slightly less dreadful than the segment competition, not a difficult target) whilst building the high margin travel business.

Then one looks at M&A activity. My tea leaves aren't good on this one. Are they prey or predator. Who is in play ? Who would over or underpay.

Then one looks at cyclical & market factors. Which geographies are they exposed to. How are the economies doing in those areas. Will it affect them.

Then one makes a buy/sell decision on the shares.

It certainly does not look like a dog, but is it overpriced ? mmmmmmmmmmm.......

- dspp

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Re: Fundamental Analysis on WHSmith SMWH

#199981

Postby TheMotorcycleBoy » February 8th, 2019, 5:06 pm

dspp wrote:That is a cracking analysis of the PL numbers.

One area you don't look at is the balance sheet. In this case, if it is to be believed, the BS appears to be under control and not hiding any nasties. Now whether any BS is to be believed is open to doubt given the propensity of finance directors to cook the books, and of auditors to skimp their checks. However at face value the BS looks to be as clean as the PL.

Thanks Dave,
That's right my first post lists mainly profitability parameters, this is part of the guff from my sheets "Results" page. They are one or two asset/gearing/equity parameters on that page. (The first 6 pages of the sheet has "year 1", .... "year 6" on each page - that's I captured the KPIs I like to study......balls - I need to bring them over to this results page as well).

FWIW I think they keep a pretty lean op. BS wise. 2018 was the first year they had any net debt at all (and that's with me including current pension obligations as contributor to debt). They current ratio is quite low however (0.85 - 0.9 most years), but I guess since they have very debt they must be able to cover themselves with their banking facilities (?).

dspp wrote:Then one looks at the underlying business model, and the strategic moves they are making in that. In this case treat the high street as an unloved cash cow to be run down & dumped if it does not deliver (i.e. they don't need to be a luvverly high street shop, they just need to be slightly less dreadful than the segment competition, not a difficult target) whilst building the high margin travel business.

Then one looks at M&A activity. My tea leaves aren't good on this one. Are they prey or predator. Who is in play ? Who would over or underpay.

Then one looks at cyclical & market factors. Which geographies are they exposed to. How are the economies doing in those areas. Will it affect them.

Then one makes a buy/sell decision on the shares.

I try to requote this in another thread I'll start for the firm itself in "Share Ideas".

dspp wrote:It certainly does not look like a dog, but is it overpriced ? mmmmmmmmmmm.......

Yes that's what I'm thinking. I'm tempted by growth prospects, but more likely at £15-16 max p/s. I think that almost £20 p/s is a bit steep for this particular one, with the OM only just teetering around/over 10%.

Matt

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Re: Fundamental Analysis on WHSmith SMWH

#199992

Postby TheMotorcycleBoy » February 8th, 2019, 5:32 pm

Here's a link to WHSmith's thread I posted on Share Ideas for more general discussion on Smith's.

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Re: Fundamental Analysis on WHSmith SMWH

#200741

Postby TheMotorcycleBoy » February 12th, 2019, 8:53 am

However, if you recalculate and (try to) adjust for leases/rents a different picture of profitability is painted.

For 2018 ROCE instead of 48% becomes 9.5% according to my calcs.[*]

A quick glimpse at why this is even possible is because WHS paid £184M in 2018 on rents/leases. However the EBIT for that year was £134. (By comparison Next Plc NXT, corresponding figures are £235M and £758M)

Thing to appreciate is that the lease/rents are non-BS items, but they are conceptually the same as ownership of a building (PPE). So approx £184M per year capitalised as if it were a mortgage payment *probably* represents about £1300M of additional fixed assets.

[*] Which I'll gladly share here if anyone is actually interested!!

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Re: Fundamental Analysis on WHSmith SMWH

#200769

Postby scrumpyjack » February 12th, 2019, 9:44 am

I wouldn’t touch the shares because any retailer is, I think, going to have to a mighty uphill struggle in future.

Their sales have barely moved over the last 5 years, which is not healthy, and presumably the profit has been kept up by cost cutting. That is not something a business can go on doing forever.

Paying £184m a year in rent is not tantamount to an asset! It is a huge liability – all those upward only rent reviews locked in for years to come in a market where the value of retail premises is falling drastically.

Still it takes two views to make a market!

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Re: Fundamental Analysis on WHSmith SMWH

#200861

Postby TheMotorcycleBoy » February 12th, 2019, 4:31 pm

scrumpyjack wrote:I wouldn’t touch the shares because any retailer is, I think, going to have to a mighty uphill struggle in future.

I think one or two retailers are cutting it. We have Next NXT and Games Workshop GAW of which we have sentiment for.

The reason for my interest in WHS stemmed from their transition to high street to travel. See in the share ideas thread. Retail (if that is defined solely in terms of consumers buying stuff) will always prevail. However the form it takes may change with time.

Their sales have barely moved over the last 5 years, which is not healthy, and presumably the profit has been kept up by cost cutting. That is not something a business can go on doing forever.

They are expanding in a global environment, i.e. opening new travel outlets e.g. in US, Oz etc. etc. - see that linked thread.

Paying £184m a year in rent is not tantamount to an asset! It is a huge liability – all those upward only rent reviews locked in for years to come in a market where the value of retail premises is falling drastically.

To be fair, when adjusting ROCE for the effect of leases, one considers the capitalised lease+rent cost as a fixed asset.....no not as something which the firm can sell on....but as an essential component since it is a proxy for *ownership* (i.e. capital investment) in their operating property.

i.e. bog-standard ROCE calculation:

= EBIT / (TOTAL ASSETS  - CUR LIAB. + SHORT BORROWINGS)

lease adjusted calculation:

= (EBIT + implied annual interest portion of leases) / 
(TOTAL ASSETS - CUR LIAB. + SHORT BORROWINGS + capitalised lease cost)

But as I said here they are off my radar.


Matt


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