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SSP Group (LSE:SSPG) is a FTSE 250 company that operates retail franchises in places like train stations, airports, and motorway services. Its brands include Upper Crust and Caffe Ritazza.
Covid-19 travel restrictions were obviously a disaster for the firm, but those are now well in the past. The stock price, however, is back where it was five years ago. Could this be a huge opportunity?
Making money
It’s hard to think SSP Group isn’t in a better position than it was in 2020. For one thing, its outlets are actually open now and they weren’t back then.
Investors might reasonably point out that despite this fact, the company is still losing money. Over the last 12 months, the firm recorded earnings per share of -3p.
The situation now, however, is quite different. The recent loss was the result of a writedown in the value of the SSP’s assets in Italy, rather than an inability to sell products.
Importantly, the firm is making money. The company generated £334m in free cash over the last 12 months, which is a big difference from the £118m outflow it witnessed in 2020.
On top of this, £3.5bn in sales represents a record high and a 150% increase from 2020. So there is – I think – no question things are going better than they were five years ago.
All of this makes it look as though the stock is the kind of opportunity that comes around maybe once in a decade. But a closer look reveals something a bit more complicated.
Balance sheet
Despite SSP’s share price being largely where it was five years ago, the company is actually around 45% more expensive. The reason is the firm’s share count has increased from 554m to 805m.
With more shares outstanding, the same price per share implies a much higher valuation of the company as a whole. So in an important sense, the stock isn’t as cheap as it was five years ago.
It’s a bit like shrinkflation. Compared to 2020, investors who buy SSP shares today still get one share and pay the same amount for it – but what they get is a smaller stake in the overall business.
Another issue is the firm’s long-term debt, which has gone from $455m to £835m over the last five years. That’s a significant increase, especially for a company with a market value of £1.25bn.
Interest rates might be falling, but they’re still well above where they were five years ago. And that’s going to make refinancing the additional debt expensive for SSP Group.
As a result, investors need to account for the fact the debt is going to need paying off sooner or later. And that’s going to have to come from future earnings (or even more shareholder dilution).
A bargain?
Despite the stock being back where it was during Covid-19, I don’t see SSP Group as a straightforward bargain. But I do think there’s a lot to like about the business.
Travel hubs are attractive retail venues, where competition is naturally limited. And the company has a strong position in these locations, which is a very desirable asset.
I think the business is worth closer investigation. But investors need to account for the increased share count and higher debt in considering whether or not the stock is a buy.
