How Brexit has contributed to 25% profit gain for SSP Group plc
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, SSP's 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, SSP'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, SSP is 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 than SSP. 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.
Therefore, 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.
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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.