We're buyers of DUFRY on the heels of the Q1 trading update. Did the company knock the cover off the ball on the top line? No. How could it? International travel is still at a standstill. But we're seeing clear sequential improvement. The company tracked 78% below 2019 in 4Q20, and is now tracking at -68%. Dufry Americas (NA, LA, SA) is tracking the best of all the regions, which is tracking 63% below 2019 levels. Recent datapoints out of Europe (46% of sales) are bullish with travel restrictions easing in the coming months, and we think that -- like in the US -- there is significant pent-up Leisure demand. Management noted sequential improvement in March < April < May, which is exactly what we want to see. It's solidly on track to secure CHf 400mm in permanent cost saves, which is bullish for the company rebounding upon reopening at new peak margins. It pushed out the timing of its covenant test, refinanced debt such that no maturities are due before 2024, and cash burn is clearly 'less bad'. DUFN also announced several new concessions, as its cadence of winning new deals seems to have picked up over the past 2-3 months. Our only knock on the quarter is that the company downplayed the success we think it's having right now in Hainan. Market share is currently ~8% with an additional 30,000 square feet opening in August. By the time this Hainan project is completed, Dufry expects to have nearly 40,000 square feet worth of retail space. We're definite buyers of the stock here.
As a reminder, there are two 'waves' of getting paid here.
Paycheck #1: Travel Recovery -- 2021-23. Business coming back as the world reopens to global travel. Leisure travel is the big meal ticket here, and is where travel industry datapoints suggest that there's major pent up demand to travel. That's what gets consumers into the stores where they're landlocked into an increasingly luxury experience -- often for hours at a time -- operating as a monopolist in each market with ZERO Amazon competition. The consensus does not have travel rebounding for another five years, and we think that they're being far too conservative. Due to new concession wins and the company upscaling the travel experience to become more of a luxury model, we have the Dufry surpassing 2019 levels of sales by 2023. On top of that the company appears to have locked in the Chf400mm in cost cuts, which alone is good for another CHf3.25 per share in EPS, or an incremental 4.5% operating margin points on top of a business that was barely doing 5% margins pre pandemic.
Paycheck #2: 2023-25 -- Hainan Opportunity. This is the Alibaba partnership, which we think people, for the most part are mismodeling bc the company is being particularly vague about the progress there. What we know is that it is a $5bn duty-free market today, and should be in excess of $40bn by 2025. China Duty Free will get the lion's share of the business, but we think that DUFRY is already clocking in at 8% share. That's little today as the market is still in a nascent stage. But as the market grows, share grows, and scale leads to higher margins. Yes, we only get 49% of that due to the Baba JV -- but it adds up materially -- to about Chf1.60-2.00 per share over 23-through 25.
Add on top of that a de-levering story as cash flow rebounds an eliminates another CHf2.50 in interest expense over a TAIL duration while buying back stock with excess cash flow and taking the (recently elevated) share count back down to earth over a TAIL duration.
There's many ways to win here. And though it is one of the top five most dominant retail models on the planet earth, it's 5.1x p/e and 3.9x EBITDA multiple on our recovery estimates has it trading well below the average US junky secularly-challenged retailer, which is completely backwards.
DUFRY/DUFN-SW remains a Best Idea long, and we're gaining confidence in the story based on today's update and recent research on travel reopening and developments in Hainan. We think it’s a double over the course of 12-18 months. Won’t be linear, so hold on for the ride. But then you get paid again on the BABA partnership once travel rebound happens, which gets us to a CHf250 stock vs CHf 61 today.
