EUR 850.00 For Business Accounts Only

Morningstar | Dufry's 1Q Sales Solid, but Concession Inflation Weighs; Shares Undervalued

We are maintaining our fair value estimate for narrow-moat Dufry after the company reported first-quarter results. Revenue grew 3.4% in the quarter versus our full-year expectation of 4%, with 2% organic growth on top of strong comparables last year (7.1% organic growth in the first quarter of 2018). Like-for-like growth remained negative (down 1.3%) while new concessions added 3.3% and currency had a positive impact of 1.4%.

The main drag on performance continued to be South America with a 10.8% organic revenue decline, driven by the difficult situation in Brazil and Argentina and tough comparables (9% growth in the year-ago quarter). Excluding South America, organic growth was 5.6% in the quarter and like-for-like growth was 2%.

Gross margin improved to 60.3% in the quarter (59.9% last year) supported by further supply renegotiations, exclusive products, and brand plan launches. Concession fees under IFRS 16 are now broken down into lease expenses (variable component; 17.3% of revenue in this quarter and 16.2% of revenue a year ago), linear depreciation of rights of use (fixed leases reflected as liability on balance sheet; 14% of revenue in the current quarter and 13.5% a year ago), and lease interest (2% of revenue this quarter versus 2.35% a year ago). Personnel expenses also increased as percentage of sales by 70 basis points (30 basis points if a one-time management-related charge is excluded) driven by minimum wage increases in the U.S. Adjusted operating cash flow declined 3.3% and the equity free cash flow loss widened. However, management still guided for a flattish operating margin for the full year and annualized concession inflation of 20-30 basis points, in line with our expectations.

We plan to adjust our model to reflect a shift to IFRS 16 accounting but don’t expect that to affect our cash flow projections and fair value estimate. We see the shares as attractive at current levels, trading at over a 30% discount to our fair value estimate.

Europe and Africa region grew 2.4% organically after three consecutive quarters of declines, with notable improvement in Spain (growth turned positive in the first quarter versus a decline in the prior quarter, helped by marketing and commercial initiatives). Asia and Middle East increased 17.3% organically, boosted by new concessions. In North America, organic growth was 5.3%, a slight acceleration from the prior quarter with strong duty paid business but less of a tailwind from Chinese buying, especially in Canada.