A sustained recovery now looks more achievable: Since the COVID-19 outbreak, the recovery trend across airline travel (and related catering operations) has been marred by successive waves of the pandemic and accompanying country level restrictions.
However, travel restrictions have been easing recently in many countries, especially for those who are vaccinated (c82% penetration for adults [18+] in the European Union as of 14 February 2022). The UK removed all entry restrictions for eligible vaccinated travellers with effect from 11 February 2022, which could boost travel gradually. Although we don’t expect the industry to regain 2019’s level yet, we think DO & CO has put itself on a stronger growth path with new contracts (British Airways, Delta, JetBlue, renewed Turkish Airlines contract), which should help the company reach pre-COVID-19 levels much earlier than the overall industry. We expect DO & CO’s revenue to recover to pre-COVID-
19 levels by FY23 (financial year starting April 2022) and reach cEUR1.5bn by FY25.
Focus on developments related to new contracts: The focus on DO & CO’s Q3 results (to end-December 2021), to be announced on 17 February, will be on the ramping
up of the new contracts in the UK and the US, along with an update on any new contracts and/or tenders. DO & CO has most recently added the hub catering business for all of Delta Airlines’ domestic and international flights out of Boston in the US to its portfolio, as of December 2021.This comes after it won a three-year hub caterer contract for the New York-JFK operations of JetBlue (see page 3). Management’s outlook for the general business recovery and the possible impact of the TRY’s sharp deprecation since October 2021 are also key factors to watch out for in the earnings call. As the airline industry has been marred by restrictions globally, we expect DO & CO’s revenue to be broadly flat sequentially in Q3 but to grow by c129% y-oy on a low base effect (see page 4).
We reiterate our Buy rating: The company is poised to grow strongly if the recovery trend plays out well and should sustain this assuming no further disruptions for the rest of the year. The company’s increasing number of robust and long-term airline contracts in major geographies boosts the scale of the business and acts as a major competitive edge for future potential contracts. DO & CO has also demonstrated its very strong cost control and so we expect it to deliver a sustained EBITDA margin of c12% on an IFRS 16 basis.
Key positive catalysts include a better-than-expected recovery in global airline traffic and DO&CO adding more contracts, as the competitive environment looks much more supportive for the company. We raise our DCF-based target price to TRY1,800 from TRY1,050 on our revised WACC and FX assumptions.
HSBC Global Research