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Up, up and away with SSP

The travel food and beverage provider looks well placed to continue to benefit from the booming air travel market, both for business and leisure
August 2, 2018

Air traffic controller strikes in France have wreaked havoc on European airlines this summer, causing some larger operators to cancel thousands of fights. One of the few with cause to celebrate the prospect of travelers stuck in departure lounges is SSP (SSPG), an operator of food and beverage outlets in travel locations in over 30 countries. More significantly, though, the group is proving a major beneficiary of strong long-term growth trends in both air and rail travel and is amplifying the benefit for shareholder with margin improvements, bolt-on acquisitions and capital returns.

IC TIP: Buy at 680p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Benefiting from increased air travel
Analyst upgrades
Improving operating margin
Contract wins

Bear points

Shares look expensive compared with history
Moderate growth in rail travel

At the latest third-quarter update, total group revenue was up 7.3 per cent at constant currency, or 5.8 per cent at actual exchange rates. Meanwhile, like-for-like sales growth was 2.7 per cent and is expected to fall between 2 per cent and 3 per cent at the full year. The impressive update prompted brokers to upgrade their forecasts, which is something investors have become very used to since the company floated four years ago (see graph below). 

Underpinning this virtuous trend of forecast upgrades are solid long-term growth drivers in the group's two key end markets. SSP generates 61 per cent of revenue from air travel locations, while another third comes from rail. These food and beverage markets are fragmented and were estimated to be worth around £14bn in 2015 (the most recent estimate given by the group). There are three key operators with SSP accounting for nearly one-third of the global market for food and drinks in transit locations.

Expectations of strong growth in air travel is underpinned by fast-growing disposable incomes in developing economies, the increased globalisation of businesses, and an increased appetite for leisure travel in developed economies, all complimented by increased investment in airport infrastructure. According to Airport Council International (ACI), air passenger numbers are expected to grow at 5.2 per cent each year to 2029, more than doubling passenger numbers from 7bn in 2015. 

Meanwhile, rail is benefiting from governments' appreciation of the environmental benefit of trains compared with cars, and over the last eight years there has been track expansion of 13 per cent in SSP's key markets: the UK, Germany and France. These key markets carried around 5.8bn travellers in 2016, with an average annual growth rate in passenger numbers of between 1.9 per cent and 3.5 per cent since 2013. 

Complementing the strong market growth, SSP continues to win new contracts, helped by the 450 brands it operates (including many big name concessions such as Starbucks) that allow it to tailor its offering to local tastes. Net contract gains were 3.3 per cent in the third quarter with expectations of gains between 4.5 per cent and 5 per cent for the full year. Bolt-on acquisitions are also helping drive the top line, with a 1.2 per cent contribution to third-quarter sales growth.

The impact of the top-line progress is being magnified by ongoing impressive operating margin growth, overseen by chief executive Kate Swann, who garnished a reputation for margin magic in her previous role as boss of WH Smith. Indeed, the forecasts in our graph below could prove conservative. 

SSP (SSPG)   
ORD PRICE:679.5pMARKET VALUE:£3.15bn
TOUCH:679-679.5p12-MONTH HIGH:700pLOW: 484p
FORWARD DIVIDEND YIELD:1.5%FORWARD PE RATIO:26
NET ASSET VALUE:86p*NET DEBT:62%
Year to 30 SepRevenue (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20151.838212.24.3
20161.9910815.45.4
20172.3814720.08.1
2018**2.5717824.19.7
2019**2.7019325.810.3
% change+5+9+7+6
Normal market size:3,000   
Matched bargain trading    
Beta:0.72   
*Includes intangible assets of £720m, or 155p a share
**Panmure Gordon forecasts, adjusted PTP and EPS forecasts