SSP Group Stock: Business is improving, but valuations remain high (OTCMKTS: SPPF)

UK foodservice venue operator SSP Group’s (OTCPK:SSPPF) business has been getting back on its feet. The company has done well to rebuild revenue after years of travel closures in some markets.

Last time I was in my “Selling” films in July 2021, SSP: There is still a long way to go and the price is too high. The stock has since fallen 23%. However, I maintain a “sell” rating on the current share price.

Basic challenges

I explained this business model and its advantages and disadvantages in my previous article “SSP Group: Weaknesses Still Remain”, so I won’t go into details here.

The pandemic and related government travel restrictions pose two long-term challenges to the SSP investment case. One is the need to increase liquidity, which it does through a dilutive rights issue in 2021. This at least helps the group move in a healthier direction. Balance sheet.

The change in reporting standards from IAS 17 to IFRS 16 makes long-term comparisons difficult, but even looking at the situation since 2020 highlights why debt remains a concern.

Overall, net debt fell. But it’s still high: the current market capitalization is just under £2bn, so current net debt is equivalent to more than half that.

Another is the fundamental weakness in hub-focused business models during periods of changing travel patterns.

The second issue, in my view, remains one of the key challenges facing the company, even if it has somewhat moved on from those tough years. Airport traffic has recovered – although we are reminded that after September 11 and during the energy crisis of the 1970s, airport traffic could change dramatically at any time beyond the influence of affected parties such as SSP. Traffic volumes at UK railway stations, another important source of revenue for SSPs, have already changed (possibly in the long term) due to shifts in working patterns brought about by the pandemic.

current performance

The company’s last trading update was in June, when it said revenue in the first ten weeks of the second half was 10% above the same period in 2019. The latest numbers include revenue from net contract earnings, so I wouldn’t treat it as a like-for-like number.

Full-year revenue and underlying pre-IFRS 16 EBITDA are expected to be capped at approximately £2.9 billion to £3.0 billion and approximately £250 million to £280 million in FY23, respectively. The company expects corresponding earnings per share (again on a pre-IFRS 16 basis) to be 7.0-7.5p.

Planning assumptions for next year (which the company claims to be “increasingly confident”, although I think it’s a bit early) are £325-340m, with corresponding EBITDA (on a pre-IFRS 16 basis) of £325-375m.

Here’s how those numbers compare to last year and pre-pandemic 2019 numbers.

Click to enlarge

Compiled by the author using data from company reports

The 2023 plan basically projects revenue to be slightly higher than 2019, which I think could mean lower sales given inflation in the interim. Underlying EBITDA is expected to grow significantly this year and again next year. But from an investor’s perspective, I think underlying EBITDA is a garbage metric. Looking at the statutory profits in the table above, last year’s profits were £9 million, while underlying EBITDA was over 15 times higher.

Perhaps most notably, underlying earnings per share next year are only expected to return to about a quarter of 2019 levels. This likely reflects lower earnings as well as stock dilution. At the beginning of this year, the company’s issued share capital was approximately 797 million common shares, compared with approximately 447 million shares at the beginning of 2020. So while some of the decline in earnings per share is due to higher share count, some is simply due to weaker earnings despite a recovery in revenue.

Strategic Plan

The company has been working on a strategy to help flesh out the credibility of profitable growth. This was discussed at a US investor event in June (one of the documents related to the North American program is here: other documents can be found on the group’s investor relations webpage). This includes:

· Stronger sales growth through a shift to markets with higher structural growth, primarily North America and Asia Pacific;

· Long-term improvement in operating margins thanks to operating leverage driven by revenue growth, efficiency initiatives and inflation-fighting pricing;

· Strong operating profit growth and continued earnings growth;

· Funding capital expenditures from operating cash flow; and

· Deleveraging.

The company also expects to resume its ordinary dividend and targets a payout ratio of c. 30-40%, with the remaining cash returned to shareholders in line with its capital allocation framework. The 2019 dividend per share was 11.8p. Even at the 40% level, if this is based on 2019 statutory profits after tax, it would be equivalent to a dividend of 7.7p per share, implying a yield of 3.2% at today’s share price. For now, though, I’m not entirely confident that 2019 statutory profit levels will recover anytime soon.

The above strategy looks good and makes sense to me. The company has been making acquisitions across North America to help bring it to fruition. While this strategy seems solid enough, it doesn’t exactly excite me. In the medium term, this will be a slow process and will not change the underlying business model. Amid the current travel boom, airport expansion in North America and the United States may seem like a gold mine. Waiting a few years for a severe recession, let alone the next unforeseen event that suddenly upends travel demand, I don’t believe it looks that smart.

Valuation

Based on forecast earnings per share for the coming year (recall that this is on an underlying non-statutory basis), the forward P/E ratio here is about 33.

That looks high for a company that I think has a good strategy but is inherently risky. I maintain a “sell” rating.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.