WH Smith hit by travel fall

Published on Thursday 4 June 2009 20:48

Scrutineer

Morrisons

254p +6.5p

WH Smith

425.25p -8.25p

SHARES in WH Smith have had a decent run, rising by a third in the past three months. But they came off the boil yesterday despite the stationery and books retailer saying in a trading update that it was confident in the outcome for the full year.

WH Smith's shares took a slight hit – closing down 1.9 per cent at 425.25p – because the market looked more at the actual numbers rather than the bullish tone (a priority that can be often reversed in the City because "tone" implies looking ahead, while numbers are of necessity historic).

Also "confident in the outcome for the full year" is a bit nebulous. You can be confident that internal worst company scenarios will be avoided, but it doesn't mean the same as wowing the market with great figures when the full annual results come out.

Like-for-like sales at WH Smith's core high street chain fell 5 per cent in the 13 weeks to end-May even though this was a slightly better performance than the 6 per cent decline in this division in the previous six months.

More worrying for the market was the 2 per cent fall in same-floorspace sales at WH Smith Travel – the division which covers the group's outlets at airports, railway stations, motorway service stations and hospitals.

This showed a worsening performance from the 1 per cent fall in WH Smith Travel at the interim stage.

The worry for the market is that this division is more prone to be hit by the general effects of the recession, with passenger footfall dropping on the railways and at airports.

A fact frequently missed is that WH Smith Travel is no add-on to the main high street business, but a contributor of nearly half of the company's profits.

More positively, the group appears to have weathered the squeeze on it from the predatory supermarkets moving into newspapers and music. And its cash position is strong.

You would have to say WH Smith is one of the retailers that has coped best with the recession on the high street (perhaps just as parents don't cut back on children's clothing at the likes of Mothercare in a recession they also don't cut back on the stationery that helps their kids' education).

But the fall-off in sales at the travel division will now be a little nagging worry at the back of the City's mind regarding the stock while the recession lasts. That was the main thing behind some of the gloss coming off Smith's share price yesterday.

FURTHER along the high street, Morrison's has done it again. Britain's fourth-biggest supermarket company has again produced industry-best sales growth figures in its first trading quarter.

That underlying like-for-like rise is 8.2 per cent (excluding fuel and VAT), ahead of the performance from its main food rivals Tesco, Asda and Sainsbury even though the whole sector is proving resilient in the downturn.

Morrison's shares responded with a 2.6 per cent jump to 254p yesterday, and it is difficult to see what more the group can do on a trading level to show it is on top of its game to further boost its shares. But, like the rest of the publicly quoted supermarket sector, Morrison's shares are hampered by walking up the down escalator of stock market sentiment at present.

The food retail sector's defensive qualities are quickly going out of fashion as risk appetite returns on better economic data.

Institutions are becoming more interested in cyclical stocks, such as commodities and non-food retailers, hoping to get in on the ground floor of eventual economic recovery.

Morrison's shares have underperformed the DJ Stoxx European retail index by 11 per cent this year.

However, on the basis that any share portfolio should have ballast as well as buccaneering brio, Morrison is still a decent buy purely on the impressive fundamentals of the business.

HOUSE prices rose at their fastest monthly rate in more than six years in May.

But we should not get carried away. Things are coming from a low base in a sector still hurting under tougher conditions being imposed by mortgage lenders and housebuilders under the cosh of heavy debt.

Halifax said house prices rose 2.6 per cent in May, the biggest increase since October 2002, while the yearly rate of house price decline fell to 13.6 per cent from 17.7 per cent in April.

Following on from the positive manufacturing and services industry data recently, the latest news from the housing front is yet more tentative evidence that we may be through the worst of the recession.

But the caveat must be that house price moves tend to be volatile during a downturn, so we should not get carried away with one month's data.

Three months data, possibly.

Craig Yeaman of Saracen Fund Managers

ONE TO WATCH

Healthcare Locums

179.5p -4.5p

Scotsman says BUY

WE ARE all aware of the pressures being applied on the economy at present and many companies are struggling with high levels of debt, a softening pricing environment and weakening demand.

Investors should look for firms with strong balance sheets, good free cash flow characteristics and visibility of earnings. One company that ticks all of these boxes is Healthcare Locums, the UK's leading specialist health and social care recruiter with a rapidly expanding international placement business.

The investment case for Healthcare Locums appears to be compelling. Demand for specialist health and social care professionals is likely to remain strong with sustainable growth about the 10 per cent level over the medium term and this is underpinned by a number of structural growth drivers.

Firstly, the UK has an ageing population but there has been a failure to train sufficient professionals to match the number retiring. Secondly, there is a recognition that it is cost-effective to use flexible workers alongside permanent staff as locums don't receive benefits such as pension provisioning or study leave. Lastly, 55 per cent of all new trainee doctors are females and this is likely to lead to more flexible working patterns as maternity leave is taken into consideration.

Healthcare Locums is trading on 8.4x 2009E P/E, falling to 6.7x 2010E whilst the dividend is forecast to double this year to 4p and then double again to 8p in 2010. The company will be debt free by the end of next year, giving it yet more flexibility to strengthen its grip on the market. Allied to this is a very capable management team and Healthcare Locums appears set fair for a number of years.

&#149 The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.

Galleon share placing raises 4m for expansion

SMALL BUT BEAUTIFUL

GALLEON, the Aim-listed entertainment media company, yesterday said it had raised nearly 4 million through a share placing.

Institutional investors bought 29.6 million shares at 13p each, netting Galleon 3.85m before expenses.

Galleon said the new shares – which represent about 21.2 per cent of the enlarged issued share capital of the company – will rank "pari passu" (equal rights] with existing shares.

The cash injection will be used to expand Galleon's business in China by extending its presence in the online games market.

Chief executive Stephen Green said: "Galleon is experiencing a period of rapid growth and this placing will help enable us to capitalise on the current market opportunity.

"Online gaming is one of the fastest growing revenue generating activities in the media sector, both in China and the rest of the world.

"Our multi-platform approach creates large online audiences and we are well positioned to create a revenue stream with online games."

Galleon, which has a market cap of about 17m, develops television programmes and then games and toys as tie-ins. The group has also made games based on films such as Madagascar, Pirates of the Caribbean and Spider-Man.

Investors cheer on Goals' fund-raising and expansion plans

SCOTS STOCKS

GOALS Soccer Centres continued its return to favour in the City yesterday as it announced plans to raise 11 million to boost its expansion.

While the revenue Goals derives from pitch hire has remained steady, it suffered from a softening of sales at its bars in 2008, which has sent its shares tumbling.

Yesterday the East Kilbride-based firm was bullish, announcing plans to increase site openings in 2010 and 2011, and indicating that there were "encouraging signs" for its non-pitch revenue. Its shares jumped 6.5 per cent to 189p, despite the share placement diluting earnings in the short term.

Shares in Robert Wiseman Dairies dropped 3p to 379p, despite analysts at KBC Peel Hunt predicting the company would benefit from the collapse of Dairy Farmers of Britain, the English co-operative that was placed in receivership on Wednesday. The analysts said Wiseman and Dairy Crest would have the chance to grab market share and improve profit margins.

Bowleven, the Aim-listed, West African-focused oil explorer, rose 3 per cent to 69.25p after asset management giant Blackrock announced it had increased its stake.

Retinal scanning company Optos continued its rally despite announcing that its finance director was leaving to go to Borders pharmaceutical group ProStrakan this week. The shares rose 3p to 73.5p.