SSP Group Plc – Considering the Reshaping and Simplification of the UK business

SSP Group Plc (LON: SSPG) is an FTSE 250 listed Company which operates food and beverage outlets in travel locations globally.  

Recent News

On 31 July 2020, SSP Group announced the selection of Judy Vezmar as an independent non-executive director effective from 1 August 2020.

Investment Highlights – Speculative Buy at GBX 227.80

1. The Group has substantial liquidity to navigate an uncertain period and is expecting to achieve growth in the medium to long term as soon as passenger demand recovers.

2. SSP Group posted a strong performance in Continental Europe and North America, with gradual easing in lockdown.

3. As per valuation metrics, EV/EBITDA, Price/Cash Flow and Price/Earnings multiples of the SSP Group Plc are currently lower as compared to the corresponding multiples of the Travel & Leisure Sector. It reflects, shares are undervalued as compared to the industry.

Update on Trading Performance (released on 1 July 2020)

In the latest update, the Company affirmed that it continued to have a material impact over the business due to the Covid-19 outbreak. Hence, the Company has taken several decisive actions to strengthen the financial position. The Company witnessed a lower level of passengers due to travel restrictions, and if the level of recovery remained low, the Company would cut up to approximately 5,000 jobs. SSPG anticipates only 20% of units would be opened in the UK by autumn.

The sales in April 2020 and May 2020 were down by 95% year-on-year (when the global lockdown continuing), while June 2020 had seen a slight recovery and decreased by approximately 90% as compared to the last year. The Company expects an operating loss of between £180 million and £250 million in the second half of 2020, along with an 80%-85% year-on-year revenue drop and underlying EBITDA in between £120 million to £190 million. At the time of update, the Company had a total liquidity position of around £756 million, including available liquidity of £413 million and additional facilities of approximately £343 million.

One Year Share Price Chart

 

Daily Chart as of 27 August 2020, before the market close (Source: Refinitiv,Thomson Reuters).

Key Risks

With deteriorated travel demand and travel restrictions, the Company anticipates reporting a substantial decline in both revenue and EBITDA in H2 FY2020. Besides Covid-19 uncertainties, even macro and geopolitical factors are currently unfavourable for the Company’s operations.

Valuation Methodology



Conclusion

The Company is beginning to witness an early sign of recovery and plans to open the outlets as travel demand picks up. However, the recovery in the UK continues to be slow, and hence, the Company is considering options to reorganise the business. The Company proposed the introduction of air bridges and the start of the summer holiday season might lead to a limited return of short-haul air travel. The Company’s focus is to resume operations gradually by keeping the cost bases lower and invest in long-term opportunities.

During the first half of FY20, the Company also won several new contracts, which strengthened the pipeline to generate value in future. The medium-term prospects appear to be positive. The Group has substantial liquidity to navigate through the uncertain short-term phase to deliver growth in the medium to long term as soon as passenger demand recovers. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation for SSP Group Plc at the current price of GBX 227.80 (as on 27 August 2020, before the market close at 8.11 AM GMT+1), and we will recommend fresh buying at the right time. 

Equiniti Group Plc – Operating with Strong Client Retention

Equiniti Group PLC (LON: EQN) is a FTSE 250 listed Company, which provides payment and administration services to the UK’s largest public-sector organisations and the world's best-known brands.

Rationale for Valuation – Speculative Buy at GBX 112.40

1. Reported profitability metrics for the first half of 2020 were higher against the industry median.

2. The Company witnessed encouraging signs of activity rebuilding in the core markets.

3. Given revenue growth, with strong client retention and new wins across all UK divisions.

4. EV/Sales, P/E, P/CF, and EV/EBITDA multiples of the EQN are currently lower than industry, which shows that shares are undervalued against the industry.

On 18 November 2020, the Company will publish the next trading update.

Financial Highlights (for the six months ended 30 June 2020, as on 30 July 2020)


(Source: Company Website)

During H1 FY20, the Company’s revenue decreased by11.7% year-on-year to £243.0 million (H1 FY19: £275.1 million). The reduction in earned income from reinvestment plans was due to the disruption in global equity capital markets amid the low-interest rate scenario. Led by deferred software and remediation projects, EBITDA reduced by 31.9% year-on-year.

The trading in June was ahead of the activity observed in April and May, and hence, the Company believes that the trading will improve further. However, the Company do not intend to return to dividend payment until they see profit growth arising from the order book. The Company has paused the activity for the reduction in debt, which stood at £355.3 million at 30 June 2020 (30 June 2019: £370.2 million). Further, the Company has reduced corporate actions and deferred software or remediation projects.

One Year Share Price Chart

 
Daily Chart as of 27 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

Some projects may overrun or may fail to meet a specified timeline, which could hamper the revenue of the Group.A combination of depressed capital markets and the unprecedented crisis brought by COVID-19 can create unavoidable headwinds in the near-term. The Company reported a substantial decline in revenue and net profit in H1 FY20 due to Covid-19 mayhem. Moreover, the timing and rate of recovery are uncertain.

Valuation Methodology



Conclusion

While the Company has withdrawn the guidance for the current year.Regarding the liquidity as at 30 June 2020, the Group had cash of £48.0 million and undrawn funds of £160.0 million (through revolving credit facility). The Company has taken decisive and swift actions on cost reduction and accelerated digitisation to withstand a continuing period of uncertainty.

The Company has shown encouraging signs of activity rebuilding in the core markets. As per valuation metrics, Price/Earnings, EV/Sales, EV/EBITDA, Price/Book and Price/ Cash Flow multiples of the EQN are currently lower as compared to the corresponding multiples of the Support Service industry. It reflects, shares are undervalued as compared to the industry.

The stock made a 52-week low and high of GBX 103.40 and GBX 234.60, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Over the course of 4 years (FY15 - FY19), the Company's revenue surged from £369.00 million in FY15 to £555.70 million in FY19. Compounded annual growth rate (CAGR) stood at 10.78%.

Based on the decent growth and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Equiniti Group at the current price of GBX 112.40 (as on 27 August 2020, before the market close at 8:06 AM GMT+1), with lower-double digit upside potential based on 12.00x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement

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