SSP Group saw it coming, at first hand. As the coronavirus outbreak began to spread in China in late January, the operator of food and drink outlets at airports and stations watched as passenger numbers fell by 90 per cent, while in Hong Kong they slumped by about 70 per cent.
Over the weeks that followed, the FTSE 250 group was forced to track Covid-19 as it spread into central Europe and the United States, shutting down its brands and franchises including Yo Sushi, Starbucks and Burger King across the world’s capitals.
The startling impact of the crisis on SSP was thrown into sharp relief yesterday, when the company reported a running underlying decline in revenues of as much as 85 per cent and turned to its shareholders and lending banks for a financial lifeline to stop it running out of cash.
SSP was founded in 1961 and operates about 2,800 outlets in airports and stations in 38 countries. The company was floated at 210p in 2014. It has long been a favourite of this column, which recommended buying the shares in July 2018, when the shares stood at 678½p.
There is a debate to be had about this fundraising. Because it was carried out as a quick-fire placing to institutional investors of shares equating to just over 19 per cent of the company, individual holders will have had the value of their stock diluted by a similar amount.
Shareholders are also going to be asked to waive a 6p-a-share final dividend that has already been approved and a £100 million share buyback has been suspended. That’s painful, although individual shareholders are believed to account for only 4 per cent of the stock.
On the other hand, with most of its diners shut, SSP is burning through cash on wages, rent and other expenses and, had it not sought the emergency capital, it would have run out of money by the end of the year.
The company has cut its capital expenditure to a mere £10 million for the rest of the year, but was facing a funding shortfall of about £250 million, according to analysts at Shore Capital. The covenants attached to its debts were due to be reviewed at the end of this month. So SSP has dealt with the problem by, first, agreeing a £112.5 million lending facility with three banks and, second, by raising £216 million in a placing at 250p a share. That should give it enough cash to operate into the new year. SSP made clear yesterday that if the impact of Covid-19 remained as pronounced by then, it would seek help under the government’s lending facility for larger companies. The process also should ensure that its leverage, at present 2.4 times pre-adjusted profits, does not become unmanageable.
Nevertheless, the hit to trading it reported is eye-watering. With the majority of its venues in lockdown, SSP’s underlying revenues are down as much as 85 per cent on last year. This month, the decline has translated into a fall in revenues of between £125 million and £135 million and a drop in operating profit of as much as £60 million.
A 23 per cent rise in SSP’s share price, up 54½p to 290p yesterday, has offset the immediate diluting effects of the placing, but the stock is still trading at distressed levels of about seven times Shore Capital’s forecast earnings. With dividend payments for the first half of the year suspended and a final payout also very much in doubt, the shares carry no yield. At this sort of level, existing shareholders should hold on, clearly, but new buyers would be taking on too large a risk, given the lack of certainty about when Covid-19 will be brought under control.
Advice Hold
Why Before Covid-19 the business was trading extremely well; now the short-term outlook for revenues is very unclear
NMC Health
A mea culpa. I recommended buying shares in NMC Health in July 2019, when shares in the FTSE 100 private healthcare operator stood at £22.88.
Five months later, Muddy Waters, the American short-seller, said that it had taken a position against the company’s share price and issued a highly critical report questioning the valuation of NMC Health’s assets, its cash, profits and reported debt levels.
As the weeks have gone by, a series of shocking revelations have emerged, ranging from the discovery of inconsistencies in its accounts and suspicions of fraud to confusion about the precise size of key controlling shareholdings and, most recently, the elevation of its stated debts by an extraordinary $4.3 billion in two separate alerts.
The shares, after falling for months, were suspended last July and the Financial Conduct Authority is investigating its accounting issues.
NMC Health was founded in the United Arab Emirates in 1975 by Bavaguthu Raghuram Shetty, a pharmacist who turned it into the largest private healthcare business in the region, where it operates hospitals, clinics and day surgeries. It owns and manages more than 200 facilities and its operations extend to more than 15 countries, including Britain, where it owns Aspen Healthcare. NMC was listed in London in 2012 for 210p a share.
There is clearly a worry that yet more problems will emerge. A review by Glaser Weil, the law firm, and Louis Freeh, a former FBI director, and his risk management firm have found evidence of suspected fraud relating to previous activities, though the precise details are not yet clear. The company is trying to establish the full extent of its debts, which are spread across more than 80 lenders and more than 75 individual facilities.
The investment case for a company in NMC Health’s business line remains compelling: exposure to the structural growth of private healthcare provision in a wealthy developed part of the world — and an expanding one at that. However, with the financial position at this business so unclear, there is probably little alternative for shareholders other than cutting their losses when they can.
Advice Sell
Why Alleged fraud and still unfolding indebtedness make it too risky
