They say that profit warnings come in threes, but do fundraisings, too? A secondary question for investors in SSP is whether tapping the market for almost £700 million since the start of the pandemic is enough to see the airport and railway station caterer through a slower potential recovery.
The third is the danger posed by the latest variant of Covid-19. Friday’s Omicron-driven sell-off left SSP shares almost two thirds below their price before last year’s market crash and almost entirely erased the gains made since the group was listed in 2014. It also took the shine off the announcement of a new boss, with Patrick Coveney, long-time chief executive of Greencore, the food-on-the-go specialist, to replace Simon Smith.
SSP may not be a high-profile public name, but its fascias, including Upper Crust and Caffè Ritazza in Britain, are instantly recognisable by millions of air and rail passengers. No surprise, then, that it has been hammered by travel restrictions since last year. Full rehabilitation will be arduous: revenue is not expected to reach the 2019 level until 2024.
The group’s ability to keep day-to-day operations afloat looks secure enough. At the end of September, it had cash and undrawn debt totalling just over £900 million thanks to the £475 million raised via its April rights issue. Under covenant waivers agreed at the time, it must maintain minimum liquidity of £150 million. That also includes a £300 million state-backed pandemic support loan, which it expects to repay in February. It’s also started to generate positive free cashflow, expected at between £60 million and £80 million. At £389 million, net debt is below the 2019 level and none of it is due for repayment before 2024.
Under a worst-case scenario modelled in June, SSP expects to have the cash resources to weather sales reaching only about half of 2019 levels by March next year and roughly 75 per cent by September. By the end of September, revenue had already reached around 53 per cent for the prevous three months.
Will a new strain send that metric into reverse? Domestic travel accounts for 60 per cent of revenue, but that still leaves a decent chunk of sales at risk if tighter travel restrictions are reimposed between Britain and Europe, in particular. There’s also the inevitable threat of the new variant leading to the reimposition of working from home for white-collar workers. Yet at present liquidity levels, even a more brief return to last year’s average monthly cash burn rate of £25 million to £30 million looks manageable.
Against earnings forecasts for 2024, the shares are trading at just under 12, far below the normal pre-pandemic range. That raises the question of a takeover interest, but analysts at Morgan Stanley think that SSP’s cash pile is large enough that it could also turn predator. The prize in this sector are the contracts that come with acquisitions, rather than the infrastructure of the businesses themselves, which has made joint ventures or opening up new units in rail stations or airports the routes for expansion.
At the end of September SSP said that its secured pipeline could lead to an increase of 10 per cent to 15 per cent in its number of units over the medium term. There’s a chance the bulk of that expansion could come later rather than sooner if Coveney sticks with his predecessor’s more cautious approach. Will it want to fork out as much for refitting outlets and hiring more staff with a new variant lingering?
The company should not be forced to come cap-in-hand to the market, but something might have to give.
ADVICE Hold
WHY The shares are cheaply valued, which compensates for the uncertainty around the pace of the recovery in revenue
Ruffer
The safe haven might be set for a return after the market ructions of last week, which should be good news for Ruffer Investment Company.
Certainly, branding itself as an old reliable investor has served it well over the course of the pandemic. Its main aim is capital preservation, investing in a mix of assets including global equities, which account for almost 42 per cent of assets, bonds and gold, as well as less conventional securities such as derivatives. The trust’s aim is to deliver a positive total annual return, after all expenses, of at least double the Bank of England Bank Rate, a low bar to vault in recent years.
However, over the past year the investment trust has generated a share price total return of 21 per cent, compared with 16 per cent from the FTSE All-Share, and a return of almost 40 per cent since the start of last year’s market crash, against just over 2 per cent generated by the index in that time. Those gains have left the shares trading at a 4 per cent premium to net asset value.
Holding credit default swaps boosted the trust’s performance during the first quarter of last year, with the value of these instruments appreciating by 90 per cent as markets tumbled. During the stormiest period, the trust delivered an NAV return of 8.2 per cent over the 12 months to the end of September last year, a period when the index fell by 17 per cent.
Inflation is now the chief risk on the mind of Hamish Baillie, the fund manager, which he argues destroys the case for the traditional 60-40 portfolio split between equities and bonds. Amid rising inflation, exposure to inflation-linked bonds and gold has benefited performance.
The trust is now seeking to raise extra cash via a share placing and offer for existing and new investors. The latter is open to often-forgotten retail investors, with the new shares priced at 296.5p a share. The deadline to participate in the offer is 11am tomorrow.
There has been some recovery from the sell-off in stocks last week, but for investors wary of more enduring volatility, either from the new Covid variant or rising inflation, Ruffer could show its worth.
ADVICE Buy
WHY The shares might offer protection against further market volatility
