By Yamini Kalia and Prerna Bedi

(Reuters) -Activist investor Palliser Capital has built a 5% stake in WH Smith, a source familiar with the matter told Reuters on Thursday, sending shares of the British travel retailer up over 5%.

Palliser intends to review WH Smith's leverage targets and capital allocation policy to bolster shareholders' return, a Sky News report from earlier on Thursday said, citing a source.

"While its (WH Smith's) travel business has grown strongly in recent years... its share price is still around COVID-19 levels and has consistently underperformed the broader Travel & Leisure and Retail sectors," James Smith, founder and chief investment officer of Palliser, said in a mail to Reuters.

WH Smith shares have fallen about 10% in the last 12 months, while those of peer SSP Group slipped about 1%.

London-based Palliser recently led an unsuccessful proposal to force mining giant Rio Tinto to abandon its dual-listed structure in favour of a primary listing in Australia.

However, its public campaign against Capricorn Energy's merger with Israeli gas producer NewMed in 2023 won major shareholder approval for a board overhaul and strategic review of the energy company.

"Our stake demonstrates our conviction that WH Smith is an attractive investment opportunity...we look forward to engaging constructively with management to ensure the share price reflects its attractive growth outlook," Smith said.

Palliser's stake will put the investor among the top 10 shareholders of WH Smith. Los Angeles-based Causeway Capital Management is the largest with a 12.2% stake, according to LSEG.

WH Smith declined to comment on Palliser's investment.

The British company - a more than 230-year-old brand - operates about 1,200 stores in airports and train stations across 32 countries. It sold its iconic UK high-street business to Hobbycraft-owner Modella Capital in March to focus on global travel retail.

($1 = 0.7364 pounds)

(Reporting by Yamini Kalia, Prerna Bedi and Yadarisa Shabong in Bengaluru; Editing by Shinjini Ganguli)