noel bennett
Funding Thesis
Dufry (OTCPK:DUFRY) is a number one journey retailer that operates retailers positioned in airports, cruise traces and vacationer areas throughout Europe, North America, South America, Africa, and Eurasia. It had been thrown into an existential disaster throughout COVID as world journey got here to a grinding halt. It raised CHF 1.9 bn in funds by way of rights situation and convertible devices and sought refinancing of its debt so as to fend off the disaster. Nevertheless, submit reopening and powerful restoration in journey demand, we consider Dufry is at an inflection level with a play on long run passenger progress together with rising passenger spends. Its latest acquisition of Autogrill would offer them options inside the F&B market and convey in additional synergies and cross promoting alternatives. We provoke this as a Purchase ranking.
Sturdy Restoration in World Journey
In accordance with IATA, Passenger journey restoration is predicted to be 95% of the 2019 ranges primarily pushed by reopening of China and restoration in air journey together with continued momentum seen in North America and European markets.
IATA
As well as, business vast income passenger kilometers (RPK), maintained its upward trajectory, consistent with passenger demand restoration, though it nonetheless stays a shade decrease than 2019 ranges. The restoration in visitors is primarily pushed by home visitors progress which has totally recovered as home visitors in China confirmed an astounding progress with a 6x+ visitors progress YoY, albeit on a low base.
IATA IATA
Whereas home journey has recovered from COVID blows, worldwide journey nonetheless stays beneath pre-pandemic ranges by ~16%.
China Home and Worldwide Month-to-month Flights
IATA
That is even though China being one of many main contributors to worldwide journey has seen solely ~30% restoration in worldwide flights. Nevertheless, sturdy progress has been seen in worldwide RPKs between Asia and the Remainder of the World with visitors seen coming again to China and outbound. In accordance with UNWTO, Chinese language vacationers spent an estimated $250 bn+ in 2019 placing themselves number one globally in vacationer spends, much more than US and UK mixed. We consider reopening of China and its rising demand of worldwide journey together with sustained progress in home visitors would drive sturdy progress in passenger air visitors within the close to time period.
Sturdy Earnings and Steerage
Dufry reported a powerful beat on revenues and earnings with Q1 gross sales up 111%, on a decrease base, pushed by 51.5% progress in natural gross sales. This nonetheless remained 2-3% beneath 2019 ranges which we expect is primarily pushed by pricing as passenger restoration is about 90% of the pre-pandemic ranges. Nevertheless, administration famous that April was even stronger with natural gross sales 2-3% above the 2019 ranges on sturdy shopper demand. Autogrill is probably going the largest driver on account of improved pricing and rising demand for comfort merchandise. EBITDA margins improved 190 bps YoY and it posted an EBITDA of CHF 134 mn, larger than a lot of the earlier years, regardless of Q1 being a seasonally weak quarter. Additional, money conversion continued to enhance on normalizing stock regardless of seasonality and is predicted to additional enhance within the mid-term on the again of enhancing working money flows and normalizing working capital necessities together with a quickly deleveraging stability sheet (it expects leverage to be round 3x on the finish of the yr).
It reiterated the steerage for the yr of 7-10% gross sales progress in its core enterprise on passenger quantity restoration and China reopening, though taking a prudent strategy to mirror the present macro uncertainties elsewhere. It expects an EBITDA margin of 8% with demand for premium merchandise has been rising together with decrease necessities of promotions to profit gross margins together with tighter value controls. We consider close to time period momentum continues to look sturdy on a powerful revival in air visitors demand, notably from China and normalizing stock and concession would result in improved working margins which might additional drive money conversion and assist deleverage its stability sheet.
Group’s leverage place improved sequentially to be at 3.1x Internet Debt/ EBITDA, consistent with its long run purpose of three – 3.5x Internet Debt/ EBITDA. Liquidity place additionally stays sturdy at CHF 2.7 bn, together with commitments signed in April 2023, to facilitate future wants with no main maturity till 2024. S&P and Moody’s additionally lately upgraded their credit standing to BB- Creditwatch constructive and Ba3 Outlook Constructive, respectively on the again of fast enchancment in working money flows and deleveraging stability sheet.
AENA Concession
AENA introduced a brand new contract for 86 duty-free shops throughout 27 airports in 2021, making it the biggest world airport tender by value, with the entire contract price c€18bn over 12 years. Dufry bid for a set of 4 tons within the AENA concession at 28% larger than Minimal Annual Assure Hire (MAGR) throughout the packages. Dufry is the present contractor, having held since 2012, which is because of expire in October 2023, with outcomes anticipated in July 2023, and is competing in opposition to Lagardère Journey Retail. Nevertheless, two key tons at excessive profile tier 1 areas in Madrid and Barcelona obtained no bids demonstrating that the concession charges within the tier 1 areas have peaked. It’s largely anticipated that Dufry would proceed to be the contractor, nevertheless, any potential detrimental on the event could possibly be a dampener (though not meaningfully on earnings as EBITDA margins remained flat to detrimental for the AENA concession as of 2019)
Valuation
Dufry traded at a median EV/ EBITDA of 9x pre-pandemic vs presently at ~5x. Even contemplating a 20% low cost to consider execution dangers and macro uncertainty, we consider it nonetheless offers an inexpensive upside to the present goal value. We provoke this at purchase.
Dangers to Score
Dangers to ranking consists of 1) Integration of Autogrill might not materialize the anticipated value synergies as deliberate. Autogrill is Dufry’s entry into the F&B journey market and its restricted expertise with the house may result in larger execution dangers. It expects value synergies of CHF 85 mn on integration which could possibly be extended or not met on account of its restricted expertise inside the sector 2) Passenger restoration may gradual on account of macro financial slowdown, any authorities restrictions, airline capability cuts or any emergence of a brand new pressure of COVID-19 as witnessed in latest occasions the place the passenger air visitors was decimated and nonetheless haven’t recovered totally 3) Lower in retail spending on account of shopper led slowdown on account of present macro financial challenges 4) Working Margins may be squeezed downwards on account of inflationary strain and wage hikes 5) any hostile influence of AENA concession in Spain going to the competitors (shaped ~6% of Dufry’s revenues in 2019) the place in it’s competing with Lagardere Journey Retail
Last Ideas
After dealing with a number of quarters of plummeting air visitors, a restoration in passenger visitors, primarily pushed by China, is predicted to drive additional progress for the airways business and Dufry, particularly. Its overhang on the Autogrill acquisition with respect to MTO can also be behind and we consider the acquisition comes at a proper time for it to enter into F&B market providing a broad assortment of options leveraging its scale and driving cross promoting alternatives to the customers. We consider the chance reward is favorable on account of progress in passenger visitors, sturdy restoration in China, synergies from its Autogrill acquisition and comfy leverage place. Provoke it at Purchase.
Editor’s Notice: This text discusses a number of securities that don’t commerce on a significant U.S. alternate. Please concentrate on the dangers related to these shares.
