Deutsche Bank cuts WH Smith stock price target on accounting issues

Deutsche Bank lowered its price target for WH Smith (LON:SMWH) to GBP7.26 from GBP10.30, while maintaining a Hold rating, due to discovered accounting irregularities in the company's North American operations. These irregularities resulted in a £30 million overstatement of the region's budgeted fiscal year 2025 trading profit, impacting over half of North American profit and approximately 20% of the group's consensus FY25 pre-tax profit. Consequently, Deutsche Bank forecasts annual earnings per share downgrades of about 20% and a £10 million adverse impact on net debt. The bank noted this issue, occurring in WH Smith's most challenged region, amplifies negative investor sentiment, with a potential rerating contingent on auditor review completion and greater clarity on North American operations.

Analysis

WH Smith (LON:SMWH) is facing significant headwinds following the discovery of accounting irregularities in its North American operations, prompting Deutsche Bank to lower its price target to GBP7.26 from GBP10.30 while maintaining a Hold rating. The core issue is a substantial overstatement of approximately £30 million in budgeted fiscal year 2025 trading profit, which accounts for over half of the region's profit and about 20% of the consensus FY25 group profit before tax. This has led Deutsche Bank to forecast a severe, approximately 20% annual downgrade to earnings per share. The financial impact extends to the balance sheet, with a projected £10 million adverse effect on net debt. Compounding the issue is that these irregularities have surfaced in what is already considered the company's most challenged region, amplifying the negative impact on investor confidence and signaling potential underlying governance or internal control weaknesses. A potential rerating of the stock is now contingent on several key developments: the completion of an auditors' review, greater clarity on the returns from capital expenditure in North America, and the resolution of earnings dilution from the company's High Street exit.

Key Decisions for Investors

• Investors should exercise significant caution, as the accounting irregularities introduce considerable governance risk and uncertainty; a full assessment of the damage is not possible until the auditors' review is complete.
• The projected 20% annual EPS downgrade fundamentally alters the company's earnings profile, warranting a re-evaluation of valuation models and investment theses for both current and prospective shareholders.
• Monitor key catalysts for a potential rerating, specifically the outcome of the audit, management's guidance on North American capex returns, and the financial resolution of the High Street business exit before considering new or adjusted positions.