SSP is expected to report H1 EBIT up 25%, according to leading analyst Jamie Rollo, of Morgan Stanley. He said that when SSP reveals its results on 21 May it will show strong margin growth offsetting fairly weak organic sales. He said this, plus the recent flurry of contract wins, should continue to support the shares, despite their relatively high valuation.
He forecast revenues of £860m (-1%), EBIT of £25m (+25%), PBT of £16m, EPS of 2.5p, and a maiden interim dividend of 2.2p.
He said he was assuming 2.7% constant FX sales growth, implying 2.5% in Q2, below Q1’s 2.9% as we expect net contract sales to weaken a little.
He said: “Q1 organic sales growth was 2.9%, another sequential slowdown (Q4 +3.1%, FY14 +4.0%). Within this, LfL sales were 2.7%, also a slight slowdown, reflecting the strikes in France, Germany and Belgium, and a tough comp. Net contract sales were +0.2%, also a slowdown on last year’s +0.7%, but better than Q4’s -0.4%. This weakness reflects the loss of the UK Rail Gourmet contract in H2 last year, and the company said it expected net gains to be stronger in H2 as new contracts in Beijing, Stansted and Dubai ramp up.
“We expect LfL sales to remain at 2.7% in Q2, before improving to c. 5% in H2 as the stronger Air business becomes a larger part of the mix. We expect net contract sales to weaken to -0.2% in Q2 (0% in H1) before improving to 3.5% in H2 as the new contracts ramp up.
“SSP has also won a flurry of new airport contracts recently including Houston, Nice, and Montreal, and if we add in the three existing big wins, then we calculate it has announced £80m of gross contract wins in the last year, or 4% to gross sales. With retention of 97-98% (i.e. 2-3% of sales lost each year), and innovation in new concepts and various new regional CEO/COOs being introduced, then the improvement to c. 1.5% net contract sales we forecast for H2 and 2016 onwards looks sensible.”
Rollo said he expected H1 margins to increase by 60bps, higher than Morgan Stanley’s FY estimate because of easier comparatives. Rollo said this implied SSP needed 10bps constant currency margin growth in H2.
Rollo said: “Our 2015 forecasts for revenue of £1.86bn, EBIT of £97m and EPS of 12.5p are a little ahead of consensus at £85m EBIT and 12.1p EPS respectively.
“Marking to market for currency would take around £2m EBIT or 2% off these forecasts. We assume +3.9% constant FX sales growth, implying an acceleration to 5.1% in H2, and 30bps margin expansion (to 5.2%), implying a slowdown to 10bps in H2. Whilst organic sales growth has been a tad disappointing, the newly won contracts should see growth rates improved from H2, and anyway margin growth under CEO Kate Swann is the main focus.
“If SSP meets our 60bps H1 estimate, we see upside risk to forecasts, though some of this could be timing, so we prefer to look at SSP on a recovered margin basis (2007 peak margin was 6.7%, which is £125m EBIT / 17p EPS on 2015e sales), where it trades at 18x P/E and 14.5x EV/EBIT, not far from Compass or TRG which we consider to have superior business models. On our actual 2015 forecasts, SSP trades on 22.8x P/E and 17.3x EV/EBIT, well above its foodservice or restaurant peers.”
