Forecast-busting quarter for SSP

We’ve written much about the unforgiving mood of markets when companies fail to hit expectations, but not so much on the positives. Food and coffee chain owner SSP Group (SSPG) benefited from an enthusiastic reaction to a strong trading update Thursday, sending the share price up 7%.

An unscheduled fourth-quarter update ahead of its 30 September financial year-end revealed business was running well ahead of company consensus. Full-year revenue is expected to increase by 19% year-on-year versus previous guidance of 17%. Strip out favourable currency movements and revenue is still up by over 11%.

Forecasts for quarterly like-for-like sales growth have doubled to 3%, while new contract wins of 8.5% is up from previous guidance of 6%. That’s snapped the stock out of what had become a month-long downtrend from a record high to 10-week low Wednesday.

It’s been an impressive rise for SSP since floating in September 2014 and we’ve made the case for the owner of brands like Upper Crust and Ritazza on numerous occasions.

The first of these came through Stephen Message, manager of Old Mutual UK Equity Income, who put aside his worries at investing in IPOs and snapped up this “great long-term buy” at 210p. Three years on and he’s looking at gains of 168%.

Analysts at JPMorgan Cazenove pinpointed the company at the start of 2015 as one of its highest-conviction trades at around 263p, but has since gone warm on future prospects. The tick up in like-for-like sales growth is mainly due to unit closures, transfers of operations at Chicago Midway Airport and Delhi redevelopment not expected until 2018, it says.

For this reason, while estimates for earnings per share (EPS) in 2017 move up 6% to 19.6p, the revenue and margin benefits will fade afterwards and EPS for 2018 goes up just 1.7% to 20.6p.

This means SSP trades at 25.8 times 2018 earnings, a chunky premium to the wider catering and concessions sector on 20.2 times. Analyst Jaafar Mestari’s target price of 415p implies 22% downside.

Liberum has been a regular cheerleader, though. It’s told us twice in the last three months that SSP, which also runs concessions at JFK Airport in New York and Charles de Gaulle Airport in Paris, is one of its top picks.

Analyst Anna Barnfather reckons there’s plenty of scope for further upgrades to come. It’s why she’s sticking with her 600p target. She believes today’s update “illustrates the significant structural growth in the sector”.

And it would be a brave investor who bets against chief executive Kate Swann, who headed up WH Smith (SMWH) for a decade between 1 November 2003 and 1 July 2013.

The share price doubled in that period and the 52-year-old former Homebase and Argos managing director clearly knows what it takes to build a leader in the travel store space – an area that’s expanding rapidly.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Source.