EUR 850.00 For Business Accounts Only

Morningstar | Launching Coverage of Dufry With Narrow Moat, Stable Trend Ratings; Shares Attractive. See Updated Analyst Note from 20 Aug 2018

We are initiating coverage of Dufry, the leader in airport and travel retail, with a narrow moat rating. We believe the shares offer an attractive margin of safety, trading around a 20% discount to our CHF 144 per share fair value estimate, which implies a 2018 adjusted P/E and EBITDA multiple of 17 times and 10.6 times, respectively.

Travel retail is an attractive niche with a captive and affluent audience, a good value proposition in duty-free (60% of Dufry’s sales), a high share of impulse purchases, and no direct competition (operators are usually the sole providers for a specific product in an airport). While airports capture the bulk of retail profits as owners of unique real estate (concession fees around 25%-30%), we believe that Dufry is likely to continue generating economic profits, as the most scaled player in a fragmented industry. It is present in 300 airports with over 20% airport retail market share, double that of the next biggest peer. Further, concession contracts are long-term (average duration of eight years for Dufry) and highly sticky (80%-90% renewal rates across the industry). Also, increasing concession fees will likely make business uneconomical for smaller, subscale operators, which would help market leaders such as Dufry take market share and consolidate the market further.

We forecast Dufry to increase revenue at 4%-5% annually over the next 10 years with some cyclicality, with a largely flat adjusted EBITDA margin, as improvements in gross margin and operating costs are offset by concession inflation. We expect both effects to moderate over time, as supply efficiencies get more difficult to extract, and as the industry consolidates and Dufry gains more negotiating clout with the airports.