Lagardere : At the onset of a new era

Lagardère profoundly revamped its business portfolio in recent years by focusing its development on travel retail and completing its exit from the distribution activities in February. This reconfiguration was carried out without pressure on the company's financial structure. Credit metrics were maintained at satisfactory levels. We estimate Lagardère's rating at 'BBB-' with a stable outlook. - We recommend Buying Lagardère 2023 and 2024 bonds which offer an attractive yield in view of our 'BBB-' shadow rating. - - >Support factors - - Successful development in travel retail, set to post global growth of around 4.9% over the 2016-2040 period. Traffic is likely to double to over 14 billion passengers by 2029. The group expects to increase its divisional sales from € 3.7bn in 2016 to between € 4.1bn and € 4.6bn in 2019 (7-10% CAGR in 2015-2019e) and recurring EBITDA of between € 260m and € 295m (vs. € 209m in 2016), i.e. an operating margin of above 6.4% (vs. 5.6% in 2016). - Upturn in the sports division (breakeven in 2014 and profitable in 2015).- Exit from the distribution activity in the retail segment and repositioning on more dynamic segments in travel retail.- Easy access to the bond market at highly attractive conditions: the latest issue in June 2017 (€ 300m, due 21/06/24) carries a 1.625% coupon (the lowest obtained since its inaugural issue in 2009). - The risk associated with the concentration of suppliers is moderate. The share of purchases made with the first, top five and top ten suppliers is 8%, 16% and 22% respectively.Points to watch - - The global advertising market is lacklustre (growth estimated at 3-3.5% in 2017, the lowest level observed since 2009) but a slight rebound is anticipated in 2018 (estimated growth of 41e4.5%). - Management of the digital transition in the books segment (piracy, lower prices).- The group's revenues are sensitive to economic conditions (impact on magazine sales, partworks and footfall at points-of-sales in air travel areas). They also depend on ads spending trends (a 1% fall in Lagardère Active's advertising revenues causes a decrease of € 2m to € 3m in the division's full-year operating profit). In addition, Lagardère Publishing's revenues are affected by changes in the loans allocated by certain states to the purchase of textbooks. In the field of sporting events, revenues are affected by the programming strategy of certain operators, especially the public players (possibility to limit or delay the acquisition of sports content, while negotiating more competitive prices). - Volatile forex can have an impact on the number of travellers and their purchasing power in duty-free shops in the currencies concerned.- Generous dividend policy (dividends + returns to shareholders).