What the SSP rights issue means for investors

Travel caterer seeks £475 million from shareholders, offering 12 new shares for every 25 held.

Bargain-hunting investors who chased SSP (LSE:SSPG) shares higher during November's flurry of vaccine trades are now faced with finding more cash to protect the value of their investment.

The travel caterer, best known for the brands Upper Crust and Ritazza, is seeking £475 million from shareholders in a fully underwritten rights issue offering 12 new shares for every 25 held.

With so many new shares set to enter circulation, shareholders who don't take up their rights will see their holding diluted by almost a third as a result of the fundraising.

The new shares are being offered at 184p, which represents a 46.8% discount to last night's closing price of 345.8p and a 37.3% discount to the theoretical ex-rights price of 293.3p, which is the level when factoring in the impact of the new shares.

The funds will significantly improve SSP's balance sheet, giving it more protection in case the recovery in the travel sector takes longer than expected. It also increases investment firepower should passengers return to airports and railway stations as expected later this summer.

However, SSP's current forecast is that it may take until 2024 for passenger numbers and like-for-like revenues to return to the levels seen before the pandemic, led by domestic and short-haul air travel. At the peak of the crisis, SSP closed about 2,500 units and furloughed more than 22,000 staff globally, with sales down 95% in April and May of last year.

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It's the second time that SSP has turned to shareholders for support during the pandemic, having raised £216 million through a placing of new shares at 250p last March. SSP was one of several companies at the time to offer up to 20% of their share capital directly to institutions and without the delay of having to publish a detailed prospectus.

A rights issue affords small shareholders the same opportunity as institutions to buy the discounted shares, although it will take SSP until 22 April to complete the process. Whitbread (LSE:WTB) and Rolls-Royce (LSE:RR.) are the other big companies to have gone down the rights issue route since the pandemic started.

SSP shares listed on the stock market in July 2014 and delivered a total shareholder return of 231% in the period up to the end of 2019, when shares were 657p. They fell as low as 161p in September, before almost doubling in value in November, as investors piled into the stock as one of those most likely to benefit from that month's vaccine breakthroughs.

The discovery of Covid-19 variants and delays in the vaccine roll-out have damaged the expected recovery, with revenues for the six months to 31 March still down 80% on the 2019 level and meaning cash burn of between £25 million and £30 million every month.

However, chief executive Simon Smith said early and extensive action had protected the business and that it was “ready to re-open rapidly” as soon as travel conditions improve.

He added: “Strengthening the balance sheet now will underpin the business if the recovery in the travel sector is slower than we anticipate and it gives us the capacity to invest in growth opportunities as we emerge from the pandemic.

“Our current expectation is that the early recovery will be led by domestic and leisure travel from which we are well-placed to benefit.”

The completion of the rights issue will mean a material reduction in net debt and trigger the extension of bank facilities from July 2022 through to a maturity date of January 2024.

If trading improves in line with expectations, SSP said its leverage would come in below its historical 1.5-2 times debt-to-earnings ratio, meaning scope for an additional £350 million to £400 million in investment with any surplus returned to shareholders.