SSP Group, LON:SSPG the global purveyor of hot lunches at railway stations and airport lounges, confirmed that the environment in the travel sector is hotter than a bowl of Nippon Ramen, with a trading update for the first four weeks of the new financial year, showcasing revenue growth of 167% compared to the same period in 2022, and 103% compared to 2019.
With sales of GBP871m, the group has defied the difficulties set by rail strikes in the UK, as results in North America and European operations more than offsetting these challenges. The catering operator confirmed its outlook for the year ahead to expect sales of GBP2.9bn.
During the update the group commented that momentum has continued to strengthen as the well-anticipated travel re-bound takes place in the years post Covid-19. SSP also noted particular strength in North America, where sales were up 125% against 2019, and this strength is set to continue, as SSP intends to make North America the second largest division, by doubling revenues in this segment to 40% of the business by 2025.
- Airline sector bracing for a tough summer on US routes
- Short of the Week: UK tax hikes will hurt JD Wetherspoon
- Tandem rides to profit: revenue up 11% despite weather woes
Despite some significant cost of living pressures, SSPs results have proved highly resilient owing to the ‘captive’ nature of much of their operations.
Sixty-six percent of revenues are tied to air travel catering, a market whereby travellers are more often than not, above average income levels and also reliant on a small number of catering options after passing through airport security.
SSP has over 2,600 catering units that often franchise popular brands such as Burger King NYSE:QSR, Starbucks NASDAQ:SBUX and Leon amongst its own concepts such as Upper Crust, which allows for resilient pricing with strong demand from consumers.
Brighter prospects
With the pandemic and travel disruptions largely behind us, SSP is looking forward to returning to growth, underpinned by signing new deals with travel venues to increase retail unit counts, and from the return to underlying growth in the travel industry, which until 2019 had shown an historic growth rate of 6.7% according to company reports.
Patrick Coveney, CEO of SSP Group said in a recent statement: “The long-term structural growth in the air and rail travel sectors and the ongoing demand from clients and customers around the world for our brands and food concepts leave us well-placed to create significant value for shareholders for many years ahead.”
Margins bounce back
The return to normal trading has helped SSP group turn the corner on profitability, arguably a sigh of relief for management considering the cumulative loss seen across 2020 and 2021 totalled an excess of GBP600m. As can be seen below, operating profit is expected to reach GBP160m in 2023, returning SSPs margin profile closer to the 7% level it had seen before the pandemic.
Source: Company Annual reports, company estimates – compiled by The Armchair Trader
Whilst one could view SSPs margins as somewhat thin, the company’s margins are in line with well established caterers such as Compass Group LON:CPG in the UK and Aramark NYSE:ARMK in North America, suggesting that the company isn’t under earning compared to its peer group.
The lasting impact of covid
In the case of SSP, Covid-19 provided a significant setback. For an early-stage company that grew revenues formidably from GBP1.7bn in 2012 to GBP2.7bn in 2019, Covid put an abrupt stop to the track record, and the vast operating losses resulted in SSP needing to issue a large amount of equity to provide the business with liquidity.
By 2022, SSP had added 351 million shares; equivalent to 78% of its issued share capital in 2019. With many shares well up from their pre-Covid highs, this increase in share volume goes lengths in explaining why SSP shares are still down over 50% from levels seen in 2020.
The FTSE250 company opened trading today (20th February) at 269.2p. The company has offered a year-to-date return of 16.4%, a one-year return of -5.3% with its shares ranging between 181.5p to 291.6p over a 52-week period. Three years ago (14th February 2020) the company was flying high at 557.1p before dropping off a cliff to 186.2p when the first phase of Coronavirus kicked-in.
The company has a market cap of GBP2.1bn.
Summary
The environment for travel related stocks has never looked better. Demand remains strong for travel experiences and much of the supply driven bottlenecks and labour shortages seen in 2021 have been worked out, resulting in positive trading for the likes of SSP.
However, the case for investing in SSP shares remains underwhelming.
The business, whilst catering to a captive consumer, incurs high costs, and is unlikely to ever spin high-foodprofit margins, as seen by some of the industry heavyweights, who also operate with thin margins too. The additional impact of heavy share issuance during the pandemic will also have created an overhang that could weigh on the shares even as the market looks to rebound.
