SSP Group plc SSPG

This firms operates concessions and restaurants in airports and rail stations, including both their own brands like Upper Crust and franchises like Burger King.

A solid one post-pandemic

What do we all make of this stock? It has risen a lot recently due to Covid recovery hopes but it has taken a beating today. Mine are up almost 10% since I invested despite the fall today, but I’m starting to think it’s too risky. I was reading that their auditors have doubts about the company and they have to raise capital and share dilution may happen.

I know this company very well. I worked for them for nearly 10 years both in stores and in their head office. I do not have insider information but I know the company better than most investors who just follow the shares and maybe know some of their franchises. Many investors are not trying to work out the value of the business but just saying “if everyone is travelling again then SSP will make money again, so it’s a buy”. I have to disagree.

If you read advfn you might have seen me very bullish on this in March last year when it dropped like a stone from a £3bn cap down to around £1bn. I felt they were great value during the panic (I thought the virus would blow over and we’d go back to normal in months) and bought on margin at £1.60.

My assumption was wrong and the virus did not blow over, yet the price surged to over £3 along with the Airlines and Travel stocks when the Central banks and governments piled liquidity in to the markets, so I was fortunate to sell at over £3 and get away with a huge profit on a poor call.

Since then it dropped back to around £2 and I felt it was still overvalued considering the worsening environment. I was looking for a sub:£1bn cap which never came, and since then it has rallied back to £3 with vaccine news and higher as it has continued to benefit from market liquidity, index funds piling in to anything and investors betting on a swift return to normal business.

The reason I think it is very expensive at this price is because SSP’s niche is selling high priced convenience hospitality in very crowded environments to captive markets. They need footfall to return to close to 100% for the whole business to be viable as they have significant fixed costs and razor thin net margins of around 6-8%.

At the moment I think the footfall in transport hubs in the UK (which is their most substantial market) is around 10-20% of where it was last year, so if SSP wasn’t in deep hibernation and fully open like a year ago they would be bankrupt within a year, as their revenue would be down 80-90%. When everything “opens back up” I expect footfall to be somewhere around 40-60% for years to come. Airlines have scrapped plane orders and laid off their pilots which is long term scarring rather than temporary, large companies have realised most staff can work from home and it is cheaper for them to do so, and ultimately very few of us will choose to be within a metre of an unknown person in the short term or perhaps never again in our lifetimes… so previously crowded environments will not be so crowded in the “new normal” . This is very very bad for SSP. They have thousands of units around the world which generate small marginal profits and those units are so unprofitable without high footfall that they will not be able to trade.

Here is a back of an envelope calc to illustrate: an average pasty shop in a provincial commuter train station might normally take £450 a day. £100 is the cost to have at least 1 staff member from 7am to 7pm, £150 is the 33% of turnover Network Rail are paid in rent, £100 cost of food/bills etc,. That leaves £100 profit for the day. 365 days a year and this small unit is contributing £36.5k a year to the company’s gross profit. 6000 units like this and you have £200m gross profit for SSP as a whole and after admin, tax and all the rest the shareholders get £150m in earnings and they value the business at a healthy PE of 20 ie. £3bn. That is basically where they were at before covid.

Now here is the same provincial commuter Station pasty shop unit in the new normal post-covid world… Footfall is down 50% so sales are now £225 a day. Staff cost still £100 as there cannot be less than 1 staff or be paid less than minwage. Network Rail now only takes £75 rent so may be looking to let to Greggs or Leon instead who might give them a better return. Food/bills marginally falls to £75 as the food still needs to be on display and lighting, refrigeration and maintenance etc remain the same. So now this average unit loses £25 a day or £9000 a year. Those same 6000 units that were adding £200m gross profit now contribute a £54m loss before any other administrative expenses. On a close to £100m net loss the market will no longer value the company at £3bn. With those results it could be anywhere below that right down to £Zero.

They can try increasing the prices but it is all so expensive already and for every extra pound they squeeze they’ll lose another from customers going elsewhere or bringing food from home.

I think the real threat here is not another dillution but instead the market waking up to the fact that the business model doesn’t work with low footfall and it will either be many years before they see a profit again or else they are going to have to chop off limbs if they want to get there quicker (eg. Close thousands of unviable units) in which case you would be looking at a business only a fraction of the size of what it was last year.

I will continue to avoid this company however there does come a price at which the long term prospects could be worth the risk… For me that is at below £1 a share unfortunately.

Sorry for the long midnight ramble. Hope my reasoning was of use to somebody rather than just coming off as me having sour grapes after selling and just slagging them off.

Good luck!

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Thanks @rarther. Very insightful post. Admittedly I bought into these shares thinking they were cheap. Looking at how far below pre-pandemic values they are. They are down to almost half what they were in February 2020 so I figured once people start flying and travelling by train again prices will go back to that level.

But you make a good point. It will be years before air travel returns to 2019 levels and train travel will be lower as more companies will be working from home permanently or part time. Less business travel means less sales for premium food outlets.

I’m now thinking these shares are even more risky at this price point. I think I’ll sell mine tomorrow whilst I’m ahead.

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Cheers for the feedback!

Plenty of optimists out there too though, so make sure to take my view with a pinch of salt before smashing the sell button :smiling_imp: Although, I’ve yet to hear a bull case that digs deeper than “they will make money after covid tho”.

Re: half price shares since Feb 2020… If you look back to announcements in March and June 2020 you will see they issued around 90 million shares in placings which is 20% more shares than there were at that 600p+ peak, so it would look more like a 480p peak in feb if you factor in that dilution. The cash they raised from those placings was used as firewood to fuel the lockdown cashburn and this month they said they are looking into options to raise once again so the discount to pre-covid is going to be almost zero when you factor in all the extra shares.

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Anyone else get a little payout for unused rights?

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I do wonder how business like these will perform after the initial spike of nostalgia when lock down ends properly. I guess a certain % of people realise they waste X amount on places like this and could instead spend more elsewhere if more sensible.

Obviously it won’t be everyone but if it is even 1 in 10 that is a 10% hit which I imagine is hard to get around and painful to the share price. No an area I would invest in personally as I think people will be a bit more selective on their excess spending.

Yes. I got a message after the rights issue ended from support informing me that the unused rights were sold and I had received proceeds from that. They told me that I had received £1.26877 per right, which was unexpected good news after not being able to exercise the right (corporate actions are not supported by FreeTrade as of March).

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