Activist investment firm Palliser has revealed it has built up a near 5% stake in WH Smith, calling the retailer an “attractive investment opportunity”.
Palliser founder and chief investment officer James Smith told investors yesterday (12 June) that WH Smith’s stock had “consistently underperformed the broader travel and leisure and retail sectors”.
According to Smith, WH Smith has strong potential following the sale of its legacy high street business, due to complete at the end of June, with the company now free to exploit long-term growth in the travel retail sector as a pureplay operator.
“Our stake demonstrates our conviction that WH Smith is an attractive investment opportunity with strong fundamentals for long-term growth, and we look forward to engaging constructively with management to ensure the share price reflects its attractive growth outlook,” he said.
Palliser highlighted long-term growth in predicted passenger footfall, growing spend per passenger, and growing space for concessions at travel locations and hospitals, predicting organic growth of 4.5%-8% for the retailer.
A source familiar with Palliser said that while the stake was the company’s first publicly-known position in a retail firm, it had undertaken a significant amount of due diligence prior to investing.
They added it was now the right time for WH Smith to improve communications with investors, to help improve the market’s understanding of its position, put capital to work on high-return uses, and align executive incentives with shareholders and return on capital.
Palliser has a track record as an activist investor, recently clashing with mining giant Rio Tinto over the firm’s refusal to unify its dual-listed share structure on the Australian exchange.
Shares in WH Smith bounced upward yesterday, closing at a three-month high of 1,109p, up 5.9% on the day’s trading, but have since dropped to 1,077p, about 1.5% up on the pre-announcement price. The stock has fallen around 9% over the past 12 months.
In March, WH Smith announced it would sell its struggling high street business to Modella Capital, to focus on its £1.4bn travel retail segment, which makes up 75% of the firm’s revenues. The firm’s 480 high street stores, which employ 5,000 people, will be rebranded under the new moniker of TG Jones.
Dan Coatsworth, investment analyst at investment platform AJ Bell, said WH Smith’s latest trading update, where it recorded constant currency revenue growth of 7% in the 13 weeks to 31 May, had been “disappointing, to say the least”.
“Spinning off the high street arm was meant to leave a business with higher margins and greater growth potential. Growth has been pedestrian from the travel arm and the shares have lagged the broader UK market this year.
“Activists often use the same playbook – they look for easy wins such as self-help measures, reining in excessive executive remuneration, pushing for management change, encouraging asset sales, and looking for more effective capital allocation. Asset sales can already be ticked off the list, but the others could be fair game with WH Smith.”
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