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Gobble up shares in SSP

SSP, the recently floated travel-hub food-and-beverage group, offers investors a compelling mix of long-term sales growth potential along with margin improvements, all of which is being overseen by the highly-regarded former boss of WH Smith, Kate Swann.
October 23, 2014

Walk through any railway station or airport hub in the UK, and it's likely you will find an Upper Crust, Millie's Cookies or Caffe Ritazza. And yet the floatation of  SSP (SSPG), which owns these concession brands and plenty more, went almost unnoticed earlier this year. Admittedly, it joined the London market amid a flurry of public listings but this company, which is worth in excess of £1bn, is an attractive investment for medium- and long-term investors. The share price has weakened of late, and hovering close to the original listing price of 210p, we think this represents a good entry point.

IC TIP: Buy at 234p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Growing rail/air passenger volumes
  • Margin improvement potential
  • Strong management
  • Good geographic spread
Bear points
  • High-teen PE ratio rating
  • Cyclical aspects

Formed as part of a demerger from catering giant Compass (CPG) in 2006, the business wants to accelerate its growth. Sales are climbing, margins are increasing and cash generation is strong. And SSP is due to start handing cash back to shareholders from as early as next year.

 

 

Crucially, food and beverage concessions are a high-margin business and there is good scope to boost profitability. With like-for-like sales forecast to grow at 3 per cent on average a year for the foreseeable future, analysts at Numis Securities expect operating margins to rise by 33 basis points year on year, from the current 4.4 per cent to 5.5 per cent by 2016. But the broker reckons that this estimate could well prove conservatives based on the opportunities to improve pricing and efficiency. Indeed, Numis sees annual margin increases of 45 basis points as entirely possible. And SSP has a good track record: since 2010, cash profit margins have risen by 130 basis points.

It's also worth nothing who's in charge. After 10 years as chief executive of high street retailer WH Smith (SMWH), Kate Swann joined SSP in 2013. Not only does she have substantial experience in the travel-retail business (WH Smith derives 50 per cent of cash profits from this channel of its business) but she also has a formidable reputation for cutting costs and boosting profitability.

But earnings growth is by no means only forecast to come from rising margins. SSP serves a million customers a day across 1,981 outlets in 125 airports and 271 railway sites across 29 countries. And, importantly, the amount that people travel is increasing at the same time as the amount they spend while they travel is rising.

Over 90 per cent of SSP's revenues are generated from air and rail channels, and rising rail and air passenger volumes have boosted group sales. Last year, global air passenger volumes rose by 4.5 per cent and in the UK alone, rail passenger volumes grew nearly 6 per cent. Global air travel is forecast to grow at approximately 5 per cent a year out to 2033, driven primarily by developing middle classes in emerging markets and the expansion of low-cost airlines. Exposure to growth in emerging markets through air travel also helps set SSP apart from its competitors, which have found themselves trapped by sluggish growth in southern Europe, specifically in motorway services.

SSP's geographic spread is pretty attractive, too. It generates 39 per cent of its revenues in the UK, a further 46 per cent in continental Europe while the rest of the world (including North America) accounts for 15 per cent. Better yet, broker Shore Capital is excited about expansion in North America. It claims the lucrative US airport concession market - worth an estimated £3.5bn - is "finally opening up". SSP currently has a 4 per cent share of this market, and the potential for further growth across the Atlantic is significant.

SSP (SSPG)
ORD PRICE:234pMARKET VALUE:£1.1bn
TOUCH:233-235p12M-MONTH HIGH:269pLOW: 210p
FORWARD DIVIDEND YIELD:1.9%FORWARD PE RATIO:19
NET ASSET VALUE:*NET DEBT:£870m†

Year to 30 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2013†1.8338.31.0nil
2014**1.8368.910.3nil
2015**1.8980.712.24.5
% change+3+17+18-

Normal market size: 10,000

Matched bargain trading

Beta:1.33

*Negative shareholder funds prior to IPO

†Pre-IPO figures **Numis Securities forecasts