The rehabilitation of the former stock market darling SSP has proven painfully protracted, a product of the near halt in travel in the depths of the pandemic and three fundraisings conducted to survive the disruption.
But the Upper Crust and Caffè Ritazza owner is serving up more than just a post-Covid recovery story in an attempt to win back the market. Regaining trade from the return of air and rail passengers in greater numbers is one route for rebuilding profitability, but expansion into the vast North American airport catering market has the potential to sustain earnings growth over the long term.
A faster recovery in sales volumes and higher contribution from winning new contracts means revenue and adjusted earnings for this year are expected to be at the top end of previous guidance of between £2.9 billion and £3 billion and £250 million and £280 million, respectively. Analysts at Shore Capital, the group’s house broker, raised its pre-tax profit forecasts for this year and next year to £131 million and £200 million, respectively.
An almost 4 per cent bump in the shares on the day barely closes the distance from the pre-Covid price. The shares trade at less than half the pre-pandemic level, giving the group an enterprise value of just 7.5 times forecast earnings before interest, taxes and other charges, a discount to the pre-pandemic average. That doesn’t afford SSP enough credit for the faster progress it is now making.
Revenue came in at 104 per cent of 2019 levels during the first half of the year. True, about 13 per cent of that was from more fickle price inflation, but even if you discount that impact, there is room for more recovery. Like-for-like sales volumes remained at 85 per cent of the pre-Covid level, which the group thinks could push higher in the second half and come in at up to 90 per cent for the whole year, driven by the stealthy return of air travel and the peak summer holiday season. New business is expected to contribute another £200 million in revenue this year. Contract renewal rates are also running ahead of pre-Covid levels.
The result? Sales of up to £3 billion this year, or up to almost 108 per cent of 2019. Come next year, and revenue is expected to kick up to £3.2 billion to £3.4 billion, which factors in just two percentage points of price inflation against this year. Instead, a much stronger return of volumes to 90 to 95 per cent of pre-Covid levels and net new business of £350 million to £400 million will do more of the heavy lifting.
Making bigger inroads to the North American airport catering market remains the big prize. SSP has a mere 10 per cent of the continent’s airport catering market and has a presence in only 30 of the biggest 80 locations in the United States. New contracts won across the globe are expected to generate £625 million in additional revenue against the 2019 level, half of which will come from North America.
The happier consequence of three fundraisings amid the pandemic, which included a £450 million rights issue in 2021, is ample liquidity to fund an expansion and keep leverage in check. True, only half the debt is effectively at a fixed rate. But the end of covenant waivers put in place in the pandemic would bode well for its ability to refinance its floating rate banking facilities at a better margin.
Those expiries also mean it can restart dividend payments, with analysts forecasting a 3p-a-share return being declared alongside final results. Capital expenditure will start to come down after next year, from £250 million this year and the next to about £200 million. Then management will start to reduce leverage, which stands at about 1.8 times adjusted earnings at the end of the year. SSP should have earned the market’s forgiveness before then.
ADVICE Buy
WHY The shares are too cheaply valued, given the strength of the recovery
Cranswick
Inflation has left Cranswick, one of Britain’s biggest pork producers, in the mire. Higher grain prices in the aftermath of Russia’s invasion of Ukraine, which has driven up animal feed costs and pushed farmers to reduce pig supply, together with wage inflation, have weighed on margins. Consumers are also feeling the pressure, which has made the comedown from the boom in home dining during the pandemic more painful.
However, the FTSE 250 food producer is coping with macro-challenges better than analysts predicted. Adjusted operating profits sneaked in slightly ahead of consensus, up 4 per cent on the previous year. The margin improved to 6.5 per cent during the six months to March, from 6.1 per cent in the first half and closer towards a five-year average of 6.6 per cent.
The Hull-based group has managed to pass on much of the cost inflation to its retailer customers. All of the underlying 14.4 per cent revenue growth in the past year was the result of higher prices, while volumes were flat. That reflected stagnant volumes for the core pork business against strong pandemic lockdown demand and lower pig stock, as well as the slow recovery from its poultry business, which had to recall some products a year earlier.
Weaker growth explains the shares’ forward earnings ratio of 16, a substantial discount to the pre-pandemic multiple of 24 and also below the long-running average, even after a near-6 per cent rise on results day. Analysts forecast subdued revenue and profit this year.
Some longer-term catalysts for earnings could emerge. One may be a further recovery in Chinese sales, hamstrung by Beijing’s strict lockdowns and the self-suspension of an export licence in one of Cranswick’s production facilities, which it is now seeking to regain. Another is the expansion of capacity and improvements in efficiency, areas where part of the £100 million in capital expenditure will be directed this year. That investment is mainly being funded by free cash generated by the business, too. Signs of a recovery in sales volumes will be needed to justify a higher share price over the next 12 months.
ADVICE Hold
WHY The shares trade at a discount but that reflects subdued growth
