EUR 850.00 For Business Accounts Only

Morningstar | Dufry Turns More Cautious on Mid-Term Growth, but Shares Still Attractive

We are expecting to reduce our fair value estimate for Dufry by a mid-single-digit percentage as the company delivered full-year results lower than we expected and introduced a more cautious mid-term target. We still see shares as attractive at these levels, our narrow moat rating is unchanged, and we still expect company to remain a beneficiary of positive growth in the passenger numbers in the years to come.

For the medium term the company now expects to grow organically by 3%-4% versus 5%-7% communicated at the previous Capital markets day in 2018. This compares with 5.4% growth over the next five years we forecast and an average 3.2% organic growth over the past three years. The revision was driven by more prudence in relation to external environment (eg. geopolitical tensions and currency devaluations in emerging markets) that have adversely impacted growth over the last few years. Equity free cash flow (after interest paid, outflows to minorities and other financing items) is now expected to increase in line with turnover from a base of CHF 350 million-CHF 400 million (CHF 370.8 million in 2018). Our forecasts already incorporate a largely flat development in profitability over the next five years.

The main performance drags this year were Latin America, hurt by devaluation of local currencies in Brazil and Argentina (organic growth was down by 3.5% in the region) and Southern Europe and Africa, where the Spanish business was adversely impacted by a change of mix toward lower spending customers, organic growth in the region was down by 2.6%.

Dufry delivered a 40-basis-points improvement in gross margin, which now stands at 59.9%, in line with our expectations. The improvement was driven by mix effect, contract re-negotiations with some local suppliers, and acceleration of brand-building initiatives. We continue to forecast gross margin expansion for Dufry over the mid-term but to a slower extent than in the past.

Selling expenses were up by 70 basis points, impacted by over one third by minimum guaranteed price on Spanish concession that had a negative operating leverage as revenue declined in the region, 10 basis points were related to lower margin cruiseline openings (higher concession fees in those contracts are compensated by lower investment needs) and around 30 basis points of normal concession inflation.

After a weak third quarter with a decline of 0.8% in revenue on organic basis, Dufry saw acceleration in the fourth quarter with organic growth improving sequentially to 1.8% thanks to the positive contribution of new openings in Hong Kong and Australia. For the year, the company delivered 2.7% organic growth, while 2019 started with an organic growth of above 3%, despite a rather challenging comparison basis of 7% organic growth in the first quarter of 2018.