RBC Capital downgrades Upper Crust owner SSP
By Michele Maatouk
Date: Tuesday 04 Feb 2025
(Sharecast News) - RBC Capital Markets downgraded Upper Crust and Ritazza owner SSP to 'sector perform' from 'outperform' on Tuesday as it said there was more valuation upside elsewhere in the travel retail sector.
"We think SSP's strategy is heading in the right direction but investors will likely have to wait a little until it pays off meaningfully," RBC said.
"We're encouraged by its action to improve its Continental Europe margin, but we do think it will be a multi-year journey.
"Likewise, we think SSP's cash generation is heading in the right direction but a more significant improvement likely won't come until next year."
RBC noted that the stock is trading at a premium to travel retail peers, hence the downgrade.
It said there are two main factors weighing on SSP's free cash flow generation. The first is higher expansion capex given a very strong new unit pipeline and the costs associated with acquisitions made in recent years.
"We are encouraged by SSP's more cautious approach to M&A now, and we think the main priorities for this year will be integration and organic expansion," RBC said. "We expect expansionary capex to remain at the 2-3% of sales level for the medium term, as SSP focuses on growth."
The second is the fact that SSP has been deploying deferred maintenance capex from the Covid-19 pandemic.
"We estimate this was circa £60mn of capex in FY24 and will be c £30mn this year," RBC said.
"However, we expect maintenance capex to return to the historical 4% of sales level next year. As such, we don't expect a meaningful recovery in FCF until FY26."
RBC maintained its 200p price target on the stock.
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