How Brexit has contributed to 25% profit gain for SSP Group plc

SSP Group PLC (LON: SSPG) looks set to be a beneficiary of Brexit.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

SSP Group (LSE: SSPG) has reported stunning results today which were boosted by a weak pound. The operator of food and drinks outlets in travel locations recorded a rise in underlying profit of 24.6% for the full year, which could move higher in future due to continued operational improvements and the further weakening of sterling. However, is this already priced in to its current valuation?

Strong financial performance

As mentioned, SSP has enjoyed a highly successful year. Its like-for-like (LFL) sales growth of 3% was driven mainly by a rise in air passenger travel, but also by improved retailing initiatives. Its underlying operating profit rose by 18% as new contract openings and operational improvements helped to boost operating margins by 70 basis points. However, when weaker sterling is factored in, operating profit growth was 24.6%, which shows that it could be a good stock to hold during Brexit.

A key reason for this is SSP’s international exposure. While Brexit could trigger a slowdown in global economic growth, SSP should offset this by benefiting from a currency tailwind. The Federal Reserve is expected to raise interest rates in future as it seeks to moderate the US recovery. However, the Bank of England is due to adopt a more dovish stance. When allied to the likelihood of higher uncertainty for the UK economy, this could cause sterling to weaken.

A fully valued share price?

Looking ahead, SSP is forecast to record a rise in its bottom line of 9% in the new financial year. While there is scope for this figure to increase thanks to weaker sterling, the company’s valuation appears to fully factor in its growth potential. For example, it trades on a price-to-earnings growth (PEG) ratio of 2.3, which indicates there is limited upside ahead.

Furthermore, SSP’s income profile is perhaps less stable than many investors realise. While it is making progress with operating improvements and new retailing initiatives, it’s highly dependent upon passenger numbers at its locations. Uncertainty exists surrounding the short term outlook for what is essentially a cyclical industry, so it would be unsurprising for investors to de-rate SSP’s valuation in the coming months.

A superior opportunity?

Restaurant Group (LSE: RTN) operates within the same sector as SSP and trades on a lower valuation. Restaurant Group has a price-to-earnings (P/E) ratio of 11.7 versus 20.7 for SSP.  Therefore, it may appear to have greater rerating potential. However, Restaurant Group’s earnings are due to fall by 11% this year and by a further 2% next year. And with inflation forecast to rise over that time period and cause a squeeze on disposable incomes in the UK, Restaurant Group’s performance could quickly deteriorate.

So while SSP is not cheap, it is a better buy than Restaurant Group. Despite uncertainty existing regarding passenger numbers in the short term, weaker sterling plus operational improvements should lead to a rising share price over the coming years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of SSP Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 FTSE 100 stocks. One sublime, the other ridiculous

Our writer doesn’t understand the appeal of Ocado. But looking at the grocer’s latest results makes him see the attraction…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Down 18% in a year, what’s next for the Greatland Gold (GGP) share price?

The Greatland Gold share price has disappointed over the past 12 months. Our writer asks whether the company’s latest update…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

With 30% annual returns for a decade, I’m buying this for my Stocks & Shares ISA

Oliver Rodzianko has been looking for a new investment for his Stocks and Shares ISA. Here's one he's decided is…

Read more »

Investing Articles

These were the FTSE 100’s dogs and stars in February

The FTSE 100 limped along last month, but some Footsie shares soared while others slumped. Here are February's winners and…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

This £43bn of passive income is up for grabs today!

As a lover of passive income, I'm always on the lookout for extra cash. The good news is that these…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Is this my once-in-a-decade chance to buy these 2 beaten-down UK shares before they rocket?

The FTSE 100 has had a bumpy ride but these two UK shares have had it bumpier. Could now be…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

£6k bought me 3,093 shares in this overlooked FTSE passive income stock yielding 9.1% a year

This FTSE 100 dividend stock pays one of the most generous levels of passive income on the index, yet often…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

With a 5.35% yield does it matter if the National Grid share price never rises again?

The National Grid share price will never fly to the stars, but given the regular supply of dividends it offers,…

Read more »