RBC cuts SSP Group to Sector Perform, says recover is 'a multi-year journey'

Published 05/02/2025, 12:28 am
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Investing.com -- RBC Capital Markets slashed its rating on SSP Group PLC (LON:SSPG) shares to Sector Perform from Outperform. The food and beverage outlets operator’s shares fell nearly 1% in London trading Tuesday.

While the company's strategy is moving in the right direction, RBC analysts caution that meaningful financial benefits may take some time to materialize.

“We think SSP's cash generation is heading in the right direction but a more significant improvement likely won't come until next year,” analysts led by Manjari Dhar noted.

Analysts also pointed out that SSP Group is currently trading at a premium compared to its peers in the Travel Retail sector.

According to RBC, SSP’s free cash flow (FCF) is being impacted by higher capital expenditures for expansion due to a robust new unit pipeline and recent acquisition costs. Although the company has adopted a more cautious approach to mergers and acquisitions, its focus remains on integration and organic growth, with expansionary capital expenditures expected to stay between 2-3% of sales in the medium term.

On valuation, the analysts highlight SSP Group is trading at 14 times its estimated earnings per share (EPS) for the calendar year 2025 (CY25), which is above the valuations of peers like Avolta AG (SIX:AVOL) and WH Smith PLC (LON:SMWH).

While below SSP Group's pre-pandemic average, RBC considers this valuation fair given the company's ongoing work on margins and FCF generation.

Despite positive trends in travel, particularly in North America, which is a key market for SSP, RBC also raised concerns regarding potential capacity constraints later in the year due to Boeing (NYSE:BA) delivery delays mentioned by airlines.

Furthermore, emerging market currency movements could disproportionately affect SSP's earnings, as the company has high-margin businesses in countries like Egypt and India.

Finally, analysts acknowledged SSP Group's efforts to improve margins in Continental Europe, including a new regional CEO appointment and a strategic plan to optimize performance.

The company targets a mid-term operating margin of 5% in this region, a significant increase from approximately 1.5% in FY24. However, they anticipate that achieving pre-Covid margin levels in Continental Europe will be a long-term endeavor.

“We're encouraged by its action to improve its Continental Europe margin, but we do think it will be a multi-year journey,” analysts said.

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