Could SSP be a recovery stock now that the world’s governments are gradually removing lockdown restrictions and making optimistic preparations for life with Covid-19 under control?
The operator of food and drink outlets in airports and railway stations across the globe certainly has been one of the London market’s travel stocks hit hardest over the past year. Investors who stuck with it through a collapse in sales and profits and an emergency fundraising will be sitting on shares the value of which has more than halved since a peak in September 2019.
Although the group is burning through cash at a most recently disclosed rate of about £25 million to £30 million a month, however, it does look as if it has ample liquidity — of about £520 million at the last count — to sustain it comfortably while trading picks up again as international economies reopen.
For the pessimists, on the other hand, there is the unwelcome risk of a fresh wave or two of coronavirus that send us all back to square one.
SSP was founded in 1961 and operates brands and franchises that serve snacks, drinks and meals, including YO! Sushi, Starbucks and Burger King. It has about 2,700 outlets in 180 airports and 300 railway stations spread across 35 countries. From an investment perspective, before the virus hit it was attractively locked into the structural increase in travel and our need to consume on the go. When restrictions on movement were at their most severe, between April and June last year, SSP was suffering a running underlying sales decline of as much as 93 per cent as business was almost halted completely. Yet it began to recover surprisingly quickly and by the end of September, the end of its financial year, about a third, or roughly 1,200, outlets had reopened.
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Meanwhile, SSP made widespread use of government schemes to furlough staff, although it did make some employees redundant. It suspended the dividend, saving more than £50 million, and called a halt to a £100 million share buyback.
Shareholders were tapped for £220 million through a placing, the company’s lending banks granted it covenant waivers and it drew £300 million under the government’s Covid-19 financing facility. None of that could prevent SSP from having to report a set of annual results that were ravaged by the pandemic: revenues that halved to £1.4 billion and £425.8 million of pre-tax losses against the previous year’s profit of approaching £200 million.
If the introduction of “road maps” gives us cause for hope, it also plays to SSP’s strengths. The group becomes profitable once half its portfolio resumes trading, which feels like a realistic near-term prospect. If the exuberance about the prospect of taking holidays again continues, the argument that the recovery will be rapid also seems plausible.
There are some clear uncertainties. Even if the Armageddon of a fresh global shutdown does not materialise, it seems likely that learning to live with Covid-19, its variants and even a successor will mean further disruptions in future. It is also perfectly possible that changes to our working practices — less time in the office, discovering the merits of video conferencing — will lead to a fall in the use of larger travel centres.
SSP does look to be in a strong position for a bounceback, but that is reflected in the shares, flat at 342½p yesterday. With no dividend expected for at least three years, there is no yield, but the stock is valued at 20 times Shore Capital’s forecast earnings. It is unlikely to tempt buyers, but existing owners should hold firm.
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ADVICE Hold
WHY Strongly placed for a post-Covid recovery, but optimism is already priced into the shares
Rentokil Initial
It’s renowned for being an expert in getting rid of unwanted pests such as fleas and termites, but less well known, perhaps, is Rentokil Initial’s position as the world’s biggest supplier of hygiene services. As well as putting soaps and sanitisers in company washrooms, it provides hygiene services for food and other retailers, hospitals, care homes and schools.
That means it has been extremely busy in the pandemic, as a global drive to get protective cleansing products into every place that has remained open has more than made up for a drop in work for locked-down offices, pubs and restaurants.
Rentokil Initial was founded as a treatment for deathwatch beetles in 1925 and its shares were listed in 1969. It took shape in its modern form in 1996, when Rentokil, as was, bought BET, the owner of a laundry and washroom services company called Initial. The group also operates landscaping, damp-proofing and plant care units.
Such was the additional demand for its hygiene services last year that Rentokil Initial accelerated an expansion drive that took it into 20 new markets, including North America, Latin America, Europe and the Middle East. That bodes well for future revenues should it be the case, as seems likely, that the quest for good hygiene doesn’t go out of fashion once coronavirus fades.
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Not that growth last year was shoddy, with revenues from hygiene up 36.8 per cent to £743.8 million, rising much faster during the second half than the first. Pest control is still the biggest division, accounting for nearly £1.8 billion of total revenues of £2.8 billion. Growth here was a modest 1 per cent, but that can be seen as impressive, given that its core hospitality customers were in shutdown for much of the year.
A pre-tax annual profit of £229.8 million was nearly a third lower than the previous year, but that was because of a big one-off benefit of about £100 million received after the sale of a workwear company.
The group has a lot going for it in terms of long-term structural growth and the shares are not too expensive. Up 5¼p, or 1.1 per cent, at 469¾p, they cost 23 times Jefferies’ forecast earnings and yield 1.4 per cent. Probably worth it over the long term.
ADVICE Buy
WHY Market leader with plenty of scope to grow
