After the chaos caused by the pandemic, SSP has finally taken flight, but sadly for the owner of Caffè Ritazza and Upper Crust, and its investors, the share price has failed to follow suit.
A lack of progress has been made even more incongruous by the latest upgrade to profit guidance for this year. Sales have been stronger than anticipated in the North American and Asian markets, where the hospitality group sees the best expansion potential.
Revenue this year is expected to come in at between £3.4 billion and £3.5 billion, which at the midpoint is about £150 million higher than previous guidance. That is expected to filter through to adjusted earnings before interest, taxes and other items of £345 million to £375 million, roughly £10 million better at the median.
If the FTSE 250 constituent meets guidance, annual sales growth should come in at almost 15 per cent this year. The post-pandemic bounceback is largely spent. But strengthening underlying demand is still expected to contribute more than half of the increase in revenue. Consumer incomes might be under pressure, but there has been no sign of travellers cutting back on food and drink spending. Disruptions means travellers are arriving even earlier at airports.
Price inflation is also expected to account for only about four percentage points of sales growth this year. That would mirror the balance between sales volume and price last year, when inflation accounted for only eight percentage points of the 38 per cent increase in revenue.
The shares are still priced well below the pre-pandemic level. Three emergency fundraisings during the pandemic are partly to blame. An enterprise value of just over eight times forecast earnings before interest, taxes and other deductions is towards the bottom of the pre-Covid range. That does not adequately reflect the strength of the recovery in sales and the balance sheet, or the gains to be had once new contracts are rolled out.
The narrative is shifting from post-pandemic recovery to international expansion. About 53 per cent of adjusted earnings before interest, taxes and other deductions is generated by airports in North America and Asia, ten percentage points higher than last year and 17 percentage points higher than 2019. It is now in 50 big US airports, up from 38 at the start of the year. The group is aiming to increase the proportion of sales it generates outside Europe to two thirds by the end of 2026.
Contracts won so far would generate £450 million in additional sales by 2027. That breaks down as 5 per cent in net sales growth this year and the next, and between 3 and 5 per cent from 2026. The top end of that range would be more closely aligned with the pace at which the group has been winning new contracts, which span about seven years, since the pandemic. The bottom end reflects some caution over whether the competition, dulled by the financial pressures on some rivals, returns. There is no sign of that yet.
The funding for secured contracts, as well as maintenance capex, is already in the bank. Available liquidity stands at just over £600 million, split 50-50 between cash and undrawn debt. That is just as well. Higher capex pushed the group into a free cash outflow last year. Another sizeable outflow can be expected this year. But a recovery in profitability meant net debt reduced to 1.4 times adjusted earnings before interest, taxes and other charges, down from 2.1 last year and below management’s target range.
As more of its recently won contracts start to mature, earnings are expected to push ahead of the pre-pandemic level. Leverage should be kept in check even if net debt ticks up.
Dividend payments have resumed, at 2.5p a share. That represents a payout ratio of 35 per cent of underlying earnings, in the middle of the new target range. It should be interpreted as another sign of confidence.
Advice Buy
Why The shares look too cheap, given the progress made
DiscoverIE
Western companies are localising their manufacturing activities. For DiscoverIE, which designs, produces and supplies customised components for multinational manufacturers, the shift out of China has caused organic sales in Asia to fall by almost a quarter in the first half of the year.
It is a stumbling block along a steadier path for the industrial group. Stronger demand elsewhere, including a 35 per cent sales bump in North America, meant organic revenue growth at a group level squeaked out a 1 per cent rise. Sales should return to growth in Asia by the fourth quarter, thinks Nick Jefferies, and be roughly flat over the second half of the year.
Supply chains have unwound and stockpiling has come to an end. An order book of £203 million gives the group about five months’ visibility over future revenue, in line with historic norms.
The idea is to produce components that become part of a client’s design specification, and then reap the benefit of repeatedly making that item over many years. The lifetime of those designs is typically between five and seven years. The value of those so-called design wins was up by almost a quarter to £190 million at the end of September.
A decline in manufacturing output in big economies means the heat has come out of the shares post-Covid. The shares trade at 17 times forward earnings, roughly half the peak at the end of 2021 and back in line with the typical pre-pandemic range. Yet the business is evolving into a fitter shape.
The group has been attempting to build more sales outside Europe, an ambition it has achieved, because 42 per cent now come from outside the Continent. That is up from just 5 per cent a decade ago.
Making its production more efficient helped to push the underlying operating margin higher again, at 12.9 per cent, from 11.5 per cent, and closer to a target of 15 per cent by 2028.
Cash generation is strong, which means the balance sheet is also in good shape. Leverage is at the lower-end of management’s target range, at a multiple of 1.6. That leaves plenty of room for more bolt-on acquisitions, which have delivered an average return on equity of 15 per cent post-tax, still outweighing a cost of capital, of about 9 per cent.
Advice Buy
Why A weaker valuation presents an opportunity
