Overall business is on an improving trend: We believe DO & CO is on a path to recovery with its overall business seen to be improving in its recently announced 1QFY22 results. The key factor to consider in our view is a gradual recovery in airline passenger traffic globally, with vaccination programs in full swing and the re-opening of economies. Although the pre-COVID-19 level of airline passenger traffic is still far off due to ongoing challenges around successive waves of COVID-19, we expect a slow but gradual recovery for the airline catering business over the next 6-7 quarters, supporting growth momentum. Additionally, we think DO & CO has carved out a stronger growth path with new contracts (i.e. British Airways, Delta, renewed Turkish Airlines contract), which can help the company reach pre-COVID-19 levels much earlier than the overall industry. We expect DO & CO revenue to recover back to pre-COVID-19 levels by FY23e (next financial year) and reach cEUR1.5bn by FY25e.
DO & CO’s growth strategy aimed at scale and diversification: We think DO & CO is in a strong position to benefit from the recovery scenario. The company has long-term contracts across all key clients which adds strong visibility on revenues, while it continues to add new contracts specifically in the high-volume North American market. This is leading to a strong outlook in terms of scale of business as well as revenue diversification, with the weight of the US expected to increase over the years. Addition of new contracts remains a strong possibility as DO & CO has increased brand/service visibility and is increasingly competitive across both Europe and the US. One of the key highlights is DO & CO’s ability to keep its complementary businesses (event catering, hotels, restaurants, cafes, lounges, etc.) up and running despite difficulties, which further adds to revenue sustainability and development of a premium brand factor.
We upgrade DO & CO’s rating to Buy (from Hold) as we see continued recovery trends for DO & CO over the upcoming quarters/years and attractive growth in cash generation going forward. Robust and long-term contract portfolio and recovery of economies suggest a strong top line and profitability recovery in the medium term. Cost structure-wise, DO & CO has showcased a very strong control and hence we expect the company to be in a position to deliver a sustainable EBITDA margin level of at least 12% on an IFRS 16 basis. Key positive catalysts include better-than-expected recovery in global airline traffic and DO & CO adding a sizeable new airline contract as the competitive environment looks much more supportive for the company.
Source: HSBC Global Research