CONCLUSION: By the time DUFRY starts to work – likely 6-9 months out, there will be easily a dozen+ multi-baggers in Retail, which is far better upside than what we’re looking at in the ‘new Dufry’. Until then, this stock is in purgatory, especially given the equity issuances that are likely to come with the Autogrill deal in a Global Quad 4 environment. With the absence (i.e. backing away) of the cost cuts announced by the former CEO, the margin profile here is simply mediocre, which is a big disappointment to us. Also, travel risks in a global recession can’t be ignored -- not a good place to be. Lastly, the political tensions and moving pieces in China over the past year have the real potential to disintermediate Dufry’s JV with Alibaba in Hainan. Are we against owning Dufry? Not really. We don’t think it’s a short. But we’re not going to fall victim to ‘thesis morph’ here in the face of major changes to the narrative, and relative to other Retail names, we simply no longer see the massive upside that we did as a stand-alone company under the former CEO.
DETAILS
Our original thesis had multiple drivers, a travel recovery play for an upscale travel retailer, margin expansion from the company leveraging the pandemic to right-size cost structure, and growth in China via a Hainan JV with Alibaba. As highlighted in today’s Capital Markets Day, the investment thesis around this company has changed dramatically, which we flagged when we got less bullish on this stock about three weeks ago (when we sensed that the CEO was backing away from his predecessor’s cost cut program). A new CEO has come in and is driving the company towards a new strategy announcing a transformational deal mid-summer in buying travel food retailer Autogrill. Under the new leadership the company has moved away from the prior 400mm CHF cost cutting targets, and it is looking like a completely different P&L profile than we had previously modeled under the former regime. Hainan is still in place as a long term strategy, but the commentary out of the company is very cautionary on this business opportunity – and for good reason. Hainan is both an opportunity and a risk, as China builds this duty-free shopping hub and tries to capture more duty free and travel spend within its own borders. Geopolitical and economic tensions have increased over the last year, and there’s every chance that regulators step in and disintermediate DUFRY as a participant in the growing Hainan market. Dufry has highlighted that outside of China, many areas are seeing passenger trends and sales getting close to 2019 levels. So the travel “reopening” part of the call is now the current operating level. Meanwhile, the macro landscape looks much worse than it did even 6 months back both in US and Europe. We don’t see anything specifically wrong with the Dufry business, but it is a highly levered company, with our Macro view being we are heading into a global recession, and we’re looking at a transformational deal that will require significant equity issuance in the next 6 months. Travel exposure is generally not a good place to be in recessions, and this one is no different.
Much is still to be determined post-acquisition. If this stock is worth owning for the longer-term call it could potentially wait until the deal closes, as management sounds limited in detail they can provide until this is one company. As we breakdown and digest guidance from today, over a TAIL duration we think you are looking at 14bn to 15bn in CHF at a 9%-10% Core EBITDA margin. Mind you, under former leadership we were looking at core DUFRY at closer to a 15% EBITDA margin. Big change there. On a HSD multiple and after deal equity dilution that puts a stock around 50 to 60 CHF or 40% to 70% upside. That’s decent, but given the TREND risk on both macro and waiting out the completion of the deal, we think there are better places to be investing long side. Yes, the stock is “cheap” but there are a lot of consumer stocks that are cheap out there, and when the time comes for consumer discretionary stocks to really start working again, which we think is 6-9 months away, there are easily a dozen names we can point to that have 3x+ upside – far more than we see with this ‘new Dufry’.
