Business World

Wednesday 26 June 2019

Duty-free giant Dufry could reap benefits of a trade war

US and China may shake world

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Click to enlarge

John Lynch

This year was a difficult one for investors and 2019 doesn't look any better. According to most analysts the road ahead will be a bumpy one, investors will have to be very selective and look for opportunities where political risks are low.

Brexit, Italy, EU parliament elections and the ECB will set the headlines in Europe and need monitoring. In Japan, the enthronement of a new emperor this year and the Olympic Games in 2020 should help its recently battered stock market.

However, the biggest problem is the tariff dispute between US and China.

US President Donald Trump's vastly important trade talks with the Chinese on the one hand and the global problems of the Huawei telecommunications giant on the other have the capacity to send stock markets crashing around the world.

Interestingly, the company we are looking at today has direct China shareholder connections and may also have a role if a full-scale international trade war was to break out.

It is the world's largest duty-free operator, a Swiss group going by the name of Dufry.

The group, which depends on internal and international air travel, could be "quids-in" if global trade suddenly fractures and tariffs and duties begin to appear where none existed before.

That's because tax-free airport shops could gain a price advantage if governments impose new levies on imports.

Interestingly, the group is also well positioned to come smiling out of a trade war, with 2,400 duty-free shops in airports, cruise liners and railway stations and operations in 64 countries.

Having first become involved in the duty-free business in Paris Le Bourget airport 60 years ago, the company has progressed to where it is now valued by the stock market at CHF5bn (€4.5bn). Dufry is living proof of the contention that while shopping in airports is duty-free, it is not by any means profit-free.

Its airport business accounts for 90pc of total sales.

Perfumes and cosmetics (Chanel, Dior, etc) account for almost 40pc of sales, wine and spirits 18pc and, as a sign of the times, tobacco trails behind food and luxury goods.

Its duty-paid business is only for domestic passengers. Surprisingly, these passengers account for the majority of air travel in the US, Brazil and China, where only 4pc of the population have passports.

Last year Dufry had revenues of CHF8.5bn and growth in all trading areas. Sales in North and Central Europe region are the group's largest with a quarter of total revenues.

The smallest is the Asia/Australia region which contributes only one-tenth to revenues but is also its fastest growing, and Dufry is well placed in the region.

A resilient duty-paid business supported its US revenues and the Latin American region was driven by strong performances in Brazil and Caribbean cruise ship business.

In the last five years, Dufry's revenue has doubled but net profits have been sluggish.

This is where the Chinese investors come in.

The Chinese airlines and finance conglomerate HNA acquired shares in Dufry but later the activist fund Elliot fancied part of the action and bought some of the conglomerate's holding.

Analysts still don't know what to make of this move, except it hasn't helped the share price which is down more than 40pc on the year.

Dufry, as the world's largest duty-free retailer, could thrive in a new restrictive trade environment.

The company could also benefit if it cracks the Chinese market and their low take-up of passports improves. After all, foreign travel is a way for the Chinese middle class to enjoy their wealth and reduce trade imbalances - a Chinese government policy.

Is it worth investing in Dufry, given its share price is at CHF96.54?

It depends on your outlook. In the present environment, the temptation to stay in cash and opt out of the market is attractive, but it is also a recipe for low returns.

So, mind how you invest in 2019 because if you can maintain liquidity when all around are losing theirs, then there will be opportunities.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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