Dufry's Q3 Revenue Strong as Expected With Better-Than-Expected Profit Windfall; Shares Cheap

We are maintaining our fair value estimate for Dufry as the firm reported expectedly strong improvement in revenue in the third quarter but at a significantly stronger improvement in profitability. We view shares as significantly undervalued at current levels. The revenue guidance for the full year was below our assumptions (CHF 6.6 billion-CHF 6.7 billion versus CHF 6.9 billion in our models), factoring in macroeconomic uncertainty and adverse currency movements; however, guidance for full-year profits and free cash flow exceeded our expectations (core EBITDA of CHF 560 million-CHF 580 million versus our estimates for CHF 491 million in our models and equity free cash flow of CHF 250 million-CHF 270 million versus CHF 15 million in our models). Management cautioned against the maintainability of the strong profitability trends, given the current hurdles with hiring, inflation, and macroeconomic uncertainty and stuck with its projections announced at the Capital markets day (75-100 basis points improvement in core EBITDA margin from 7.8% in 2023-24 and over 20% of core EBITDA equity free cash flow conversion). Current annual results already imply 60-100 basis points expansion from 7.8% and equity free cash flow conversion of over 40%. Our forecasts already implied stronger improvement of operating margin from 2023-24 compared with the CMD targets, despite projecting lower profitability in 2022.