Exposure To Expanding International Demand Will Drive Long-Term Performance And Margin Improvement

Key Takeaways

• Strategic exits from loss-making businesses and efficiency improvements aim to boost profitability by cutting costs and increasing net margins.
  
• Focus on long-term sustainable growth and contract wins, especially in high-growth markets, positions SSP Group for future revenue and earnings growth.
  
• Profitability in European markets is pressured by macroeconomic factors, execution issues, and contract renewals, while labor costs challenge North America margins.

Catalysts

Operates food and beverage outlets in North America, Europe, the United Kingdom, Ireland, the Asia Pacific, Eastern Europe, the Middle East, and internationally.

• SSP Group's focus on long-term growth through contract renewals and new wins, particularly in high-growth markets like North America, Asia, and the Middle East, positions the company for future revenue growth due to a stronger competitive position and market expansion.
  
• The planned strategic exit from loss-making operations, such as the German motorway service business, and efficiency improvements in Continental Europe are poised to positively impact net margins by reducing costs and increasing profitability.
  
• With significant recent investments maturing and the integration of acquisitions underway, SSP Group expects to enhance operating profit margins through increased returns on these investments, thereby driving future earnings growth.
  
• The implementation of cost-efficiency programs, including menu optimization and technological advancements across various regions, is anticipated to improve net margins by mitigating inflationary pressures and enhancing labor productivity.
  
• SSP Group’s emphasis on driving sustainable growth through like-for-like improvements and contract extensions, alongside maintaining a disciplined approach to future capital expenditure, is expected to bolster free cash flow and facilitate shareholder returns, ultimately supporting long-term earnings growth.

SSP Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SSP Group's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.7% today to 4.2% in 3 years time.
• Analysts expect earnings to reach £176.2 million (and earnings per share of £0.15) by about September 2028, up from £-23.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, up from -51.7x today. This future PE is lower than the current PE for the GB Hospitality industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.94%, as per the Simply Wall St company report.

SSP Group Future Earnings Per Share Growth

Risks

• The profitability in parts of the Continental European region has fallen short of expectations due to macroeconomic, structural, temporary, and executional headwinds, negatively impacting regional margins and overall earnings.
  
• The company faces challenges in recovering rail passenger numbers to pre-COVID levels, particularly in Northern Europe, potentially affecting future revenue growth in this segment.
  
• Disruptions and costs associated with the high volume of contract renewals, especially in the Nordic countries, have put additional pressure on profitability and projected net margins.
  
• The ongoing exit from the loss-making motorway service business in Germany will require cost management and strategic focus, impacting cash flows and short-term net income.
  
• In North America, labor inflation and supply-side labor shortages continue to put pressure on costs, which could challenge the company's ability to maintain or improve operating margins.

Valuation

• The analysts have a consensus price target of £2.292 for SSP Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.3, and the most bearish reporting a price target of just £1.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £4.2 billion, earnings will come to £176.2 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 12.9%.
• Given the current share price of £1.52, the analyst price target of £2.29 is 33.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.