Rekomendacja Baltona

∎ Baltona Group is a duty-free & travel retailer. The main scope of business of the Group is

the sale of goods in duty-free airport shops located in Europe. The Group also generate sales

from B2B transactions by distributing goods to ship stores and diplomatic posts. The Group

has recently entered into the new segments: Food & Beverage and B2B, which has been

dynamically developing.

∎ Rapid increase in sales. Baltona Group published its third-quarter results for period ending

on 30 September 2015. The Group generated total sales 9M/2015 of PLN 345.3m, which

corresponded to a growth of +28.8% y-o-y.

∎ High profit margins. The Group maintained high margins during the latest quarter, achieving

EBITDA 9M/2015 of PLN 15.5m (vs. 9M/14: PLN 6.8m). During 9M/2015, Baltona Group

generated operating cash flows of positive PLN 9.8m (vs. 9M/14: PLN 6.6m). The Group

generated high profitability ratios with ROE and ROIC above 40% (as of 30 September 2015).

∎ Air-traffic growth. The Group benefits from growth in air transport of passengers in 2015.

Global passenger traffic continued to grow strongly by +6.3% y/y in 11M/2015, while the

Polish passenger traffic increased by +13% in 12M/2015. This growth has been fuelled mainly

by increase in charter flights, which provide clients willing to pay for high-margin products.

∎ Sustainable competitive advantage. Leader at Polish duty-free & travel retail market with

limited medium-term risk of the competition to be visible at Polish airports, as there is no

interest from the big players to show up at airports below 5mln PAX.

∎ Low-valuation. The Group currently trades at relatively low valuation multiples vs. retail

sector in Poland with EV/EBITDA of 4.59 and P/E of 12.06 vs. Sector Avg.: EV/EBITDA of

9.32 and P/E of 16.74.

∎ Corporate restructuring. We believe that positive impact of the bottom line enhancement

will come soon (e.g. logistics, reducing underperforming segments) and should be seen in

boosting margins in mid-2016 and translate to significant increase in free cash flow margin.

With regards to short-term market perspective, the 1Q/16 financials should come out

relatively good providing potential catalyst for the performance of the share market price.

∎ Based on our valuation framework we set a 12 month target price of PLN 7.86 an upside

of 58% at the current price. In our opinion, the company’s sales growth, deliberate and

well-knit long-term strategy, debt reduction, strong cash-flow along with the convincing

growth in airport traffic are strong support for good direction of stable, organic development

of the company.

Key_Facts

in PLNm 2012 2013 2014 2015E 2016E 2017E

Net sales 182.7 245.5 364.7 436.1 514.6 540.3

EBITDA -0.8 1.5 9.4 16.9 24.0 29.0

EBIT -8.0 -3.6 2.8 10.1 17.1 21.8

Net income -8.5 -6.1 -3.7 6.6 11.2 15.0

EPS 0.3 -0.5 -1.1 0.6 0.9 1.2

Tangible BVPS 1.4 0.4 -0.2 0.4 0.6 0.9

RoE n/a n/a -38.9% 67.5% 76.5% 80.4%

EBITDA margin n/a n/a 2.6% 3.9% 4.7% 5.4%

P/E n/a n/a -5.70x 10.43x 6.66x 4.99x

P/Tangible BVPS n/a n/a -37.85x 16.27x 10.46x 6.69x

EV/EBITDA n/a n/a 10.22x 5.68x 3.99x 3.31x

Benefiting from air-traffic growth

2nd February 2016

Europe | Poland | Retail

Initial Coverage

BUY

Target price: PLN 7.86

P.H.Z. Baltona S.A.

Dr. Norbert Kalliwoda

[email protected]

Phone: +49 (69) 97 20 58 53

www.kalliwoda.com

Price Chart

Analysts:


Email: [email protected]

Dr. Piotr Arendarski

Email: [email protected]

Phone: +49 69 97 20 58 53

www.kalliwoda.com

Industry: Retail

Country: Poland

ISIN: PLBALTN00014

Reuters: BAL.WA

Bloomberg: BAL.PW

Website: www.baltona.pl

Last price: 4.91

High Low

Price 52 weeks: 8.80 5.84

Market cap. (PLNm) 60.18

No of shares (m) 12.26

Shareholders

Ashdod Holdings Ltd. 80.68%

Free float 19.32%

Performance

4 weeks -23.28%

13 weeks -29.86%

52 weeks -24.46%

YTD -23.28%

Dividend

in PLN in %

2012 0.00 0.00%

2013 0.00 0.00%

2014 0.00 0.00%

2015 0.00 0.00%

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

sty 12 wrz 12 maj 13 sty 14 wrz 14 maj 15 sty 16

Baltona S.A.

mailto:[email protected]

2 Baltona Group| Initial coverage | February 2016

Dr. Kalliwoda International Research GmbH | Initial coverage

Content

1. Group Profile

2. Swot Analysis

3. Valuation

4. 9M/15 Financial Results

5. Outlook

6. Shareholder Structure and market price development

7. Financials



1. Group Profile

The main scope of business of the Group is the sale of goods in duty-free airport shops, located in Europe. This

activity is performed under the "Baltona Duty Free" logo.

The Group generates sales from three segments:

- Duty-Free and Travel Retail (DFTR)

o Sales of branded products at airports in free-duty zones

- B2B sales (B2B)

o Shipchandling – provides ships with food & beverages and other goods

o Diplomatic posts and military communities – provides food & beverages

- Food & Beverages (F&B)

o provides food & beverages services at airports and railway stations

The format of business (outlets) is separated into the following categories:

- Multistore – Multi categories

- Boutique – Selective fashion store

- Zoom – Souvenir and travel shop

- Starter – Convenience shop

- Cavarious – Modern quality Café

- Travel Chef – Restaurant/Bistro

- Coffee Express – Cafe to go

- Corner Dog – classic American hot dogs

Additionally, the Group operates under logo of the firm Chacalli De Decker. The firm is specialised in

the supply of duty free, tax-free and luxury goods directly to diplomats, the military, wholesale

customers and to the general public through the network of airport stores.

The Group is a part of corporate structure of Flemingo International – the fastest growing international

duty free operator with revenue of nearly USD 500m in 2014, present in over 37 countries in Africa,

East, South America, India and Europe.

The Group was established in 1946 and in the beginning, it was focused on exporting goods to free

economic zone. Thereafter, it started other activity as retail at border crossing, shiphandling and

providing on board catering. In 2010, Baltona Group was acquired by Flemingo International and one

year later the Group has been listed on the Warsaw Stock Exchange. In 2013, the Group and its majority

owner, Flemingo, have acquired Belgian duty free company Chacalli De Decker for €3.5m.

The Group employs 400 people as of 31 December 2015.



As of the end of 2015, the Group operates in 8 countries, including Poland, France, Netherlands, Italy,

Ukraine and Romania and manages 50+ outlets in 18 locations. The largest two locations in terms of

shopping area are outlets in Gdansk Airport - Poland (1612 m2) and Poznan Airport – Poland (1525m2).

In total, the Group has 38 duty-free shops, 13 F&B outlets, 8 open space shops, 2 harbour shops, 2 ship

handling outlets and 1 border shop.

The graph below presents the Group’s locations.

Source: company presentation



2. SWOT Analysis

Source: Dr. Kalliwoda International Research GmbH

Strengths Weaknesses

- Stable and growing at double digit revenues - Strong competition from global market leaders

- Strict control over SG&A costs and drop of financial costs at the largest airports

- May grow even in economically difficult times as clients - Consumer expenditures are highly correlated with

are captive and tempted to buy while waiting for travel the economic cycle via level of salary

- Baltona Group' business is well diversified - Likely dilution of earnings per share due to the

- Ultra diversified customer structure Employee Stock Options programme, but maximum dilution

- Management and members of Supervisory Board of earnings is capped at 9%

own company's shares - Dependency on local events eg. terrorism threat

- The number of passengers serviced at Polish airports in - For technical reasons, the level of purchase is limited

12M/2015 increased by 13% yoy, moreover the growth at at the airports, because traveller has limited space on board

the Polish airports where the Group operates grew by 21%

- World passenger traffic continues to grow strongly

by +6.3% yoy in November 2015

- Highly scalable business model allows for significant

dividend payouts in the long run

- Medium to high barriers of entry

Opportunities Risks

- Likely participation in obtaining license at airports in Bremen - Loss of license at airports due to lapse of contracts

- Anticipated increase of consumer spending in Poland - Dependence on prosperity of an airport

- Changes in the management board - Existing cannibalization risk among particular

- Potential for scale up business in Europe locations within one airport

- Airlines may be benefiting from the sharp fall in the oil price - Shortage of proper floor space

which could result in more competition in the airline - Issues pertaining to price negotiation with suppliers

and lower prices in order to fill their aircraft. - Climatic events

- The Brands can take great advantage of the - Interest rates level

development of the use of new technologies, such as the - Exchange rates volatility, especially EUR/PLN and USD/PLN

pre presentation of the products on the airlines websites - Baltona Group's business is seasonal; Q1 and Q4 is

usually worst and Q3 is best, which could be a challenge

for cash management



3. Valuation

In order to account for current market valuations, we have valued Baltona Group by using DCF model.

For our model we have used the following assumptions: risk-free rate of 4.0%, beta of 1.3, terminal sales

growth rate of 3%, corporate income tax rate 19%. With WACC (weighted average cost of the capital) of

8.7%, our DCF-based fair value of Baltona Group is PLN 7.86.

a. DCF-model

Source: Group data, Dr. Kalliwoda International Research GmbH

b. Peer Group Analysis

We have additionally conducted a plausibility check of the valuation, which was derived by our DCF

model. The application of a relative valuation method is based on the idea that comparable companies

have similar market values. Hence, listed companies are chosen, which offer similar products, or have

a strictly similar business model. The analysis of financial figures provides an estimation to which

degree the Group’s valuation stems from a low comparability with its peer group or an under- or

overvaluation.

in PLNm 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Total revenues 436.08 514.57 540.30 571.64 611.66 660.59 720.04

(y-o-y change) 19.6% 18.0% 5.0% 5.8% 7.0% 8.0% 9.0%

EBIT 10.08 17.12 21.76 28.83 31.09 33.97 37.58

(operating margin) 8.0% 12.0% 15.3% 17.5% 19.4% 21.2% 21.1%

NOPLAT 8.77 13.87 17.62 23.35 25.19 27.52 30.44

+ Depreciation & amortisation 6.80 6.90 7.24 7.66 8.20 8.85 9.65

= Net operating cash flow 15.57 20.76 24.86 31.01 33.38 36.37 40.09

- Total investments (Capex and WC) -9.35 -12.50 -8.11 -15.93 -11.88 -16.03 -17.62

Capital expenditure -3.51 -8.40 -9.53 -10.37 -12.54 -12.86 -14.43

Working capital -5.84 -4.10 1.42 -5.56 0.66 -3.17 -3.20

= Free cash flow (FCF) 6.22 8.26 16.76 15.08 21.50 20.34 22.46

PV of FCF's 6.22 7.60 14.18 11.75 15.41 13.41 13.63

PV of FCFs in explicit period 82.21

PV of FCFs in terminal period 33.57

Enterprise value (EV) 115.77

+ Net cash / - net debt -27.25

Shareholder value 88.53

Number of shares outstanding (m) 11.26

WACC 8.7%

Cost of equity 10.5%

Pre-tax cost of debt 5.5%

Normal tax rate 19.0%

After-tax cost of debt 4.5%

Share of equity 70.0%

Share of debt 30.0%

Fair value per share in PLN (today) 7.86



The input data of the peers stem from the information provided by Thomson Reuters. The forward-

looking financial data of the peer group represents the mean average of all analyst ‘estimates, which are

available on Thomson Reuters.


Based on our peer multiples, the implied fair value equals PLN 15.00 per share.

c. Piotroski F-Score

Piotroski F-Score assigns a score from 0 (more likely to go bankrupt) to 9 (strong financials) based on

9 PASS/FAIL tests. This analysis influences our forecast of trends and cost of equity. We use TTM

values (9M/14 – 9M-15).


Baltona Group’s F-Score = 9 (range: 0 – 9)

d. Summary:

Due to the fact the peer group analysis is based on only two strict comparable firms, the valuation based

on this method should not yield fair value of Group. Therefore, we do not use the conclusion from peer

group analysis into calculating the target price, but rather along with Piotroski F-Score we use them as

a plausibility check of the valuation.

Hence, based on our DCF valuation framework, our target price for the stock equals to PLN 7.86.

EBITDA margin

Company 2014 2015E 2014 2015E 2014 2015E 2015E

Duty Free International Limited (Malaysia) 0.56x 0.57x 3.83x 4.18x 4.05x 4.45x 13.55%

World Duty Free S.p.A. (Italy) 1.46x 1.35x 12.11x 15.91x 70.02x [negative] 8.46%

Median 1.01x 0.96x 7.97x 10.05x 37.04x 4.45x 11.00%

Baltona Group (PLN) 0.27x 0.23x 10.58x 5.88x 35.92x 9.85x 2.57%

Premium/Discount -73.0% -76.2% 32.7% -41.5% -3.0% 121.5%

Fair value Baltona Group (PLN) 15.00

EV/EBITEV/Sales EV/EBITDA

Piotroski F-ScoreProfitability Yes (1) or NO (0)

Positive net income 1

Positive Operating CF 1

Higher ROA 1

Operating CF > Net Income 1

Leverage Components

Lower debt 1

Higher Current Ratio 1

Lack of shares dilution 1

Operating Efficiencies

Higher Gross Mgn 1

Higher Asset Turn 1



4. 9M/15 Financial Results

a. Revenues, Profitability

Baltona Group published its third-quarter results for period ending on 30 September 2015. The Group

generated total sales of PLN 345.3m, which corresponded to a growth of +28.8% y-o-y. Sources of

revenues consist mainly of duty-free sales.


The Group maintained high EBITDA margin during the latest nine months, achieving margin of 4.5 %.

The Group generated revenues mainly from domestic outlets, which constitutes 67% of revenues.

Moreover, we can observe sales diversification. There is a y-o-y change in revenues share with regard

to country origin in favour for foreign sources (66% share of revenue from domestic sources in 9M

2014).


More importantly, the growth in sales was accompanied with maintaining higher margins at all level of

P&L, net income margin increased to 2.0% (vs. 9M/14: -1.1%).

9M/15 results compared to previous year


Sales split

in PLNm 9M/15 9M/14 change (%)

Open Sales 67.30 54.70 23.0%

Duty-Free Sa les 194 170 13.9%

Others 84.38 43.27 95.0%

Total revenues 345 268 28.8%

Country sales split: Q3/15 vs. previous year


Poland 230 183 25.7%

Foregin revenues 115 85 35.3%

in % of Total Sales

Poland 67% 68%

Foregin revenues 33% 32%

9M/15 vs. previous year period


Net sales 345.3 268.0 28.8%

EBITDA 15.5 6.8 128.1%

EBITDA margin 4.5% 2.5%

EBIT 10.2 1.8 466.7%

EBIT margin 3.0% 0.7%

Net income 6.8 -3.0

Net margin 2.0% -1.1%



High net margin has been achieved due to the fact that usually 9M period’s profit magins are higher

than margins for 12M period due seasonality of the Group’s business. The chief of revenue stream is

generated during 2Q and 3Q. Therefore, we predict net margin to be slightly lower at 12M/2015 vs.

9M/2015.

b. Balance Sheet and Cash Flow

As of 30 September 2015, the most important position on Baltona Group´s balance sheet were trade

payables of PLN 39.2m and inventories of PLN 32.5m. Total assets amounted to PLN 98m.

In the 9M period, Baltona Group generated an operating cash flows of positive PLN 9.8m (vs. 9M/14:

PLN 6.6m), which was higher than last year mainly due to increase in net income and positive change

in inventories. Purchases of assets for PLN 2.2m was the main factor contributing to negative cash flows

from investing activities of PLN -2.2m (vs. 9M/14: PLN –3.8m). The Group generated negative cash

flow from financing activity of PLN -2.8m (vs. 9M/14: PLN -3.6m), mainly due to the repayment of

outstanding debt. In total, change in cash was negative of PLN -4.4m (vs. 9M/14: PLN -2.4m).

In terms of working capital management, the Group significantly improved inventory management,

achieving inventory turnover of 6.9 (vs. 9M/14: 5.3). On the other hand there is a deterioration in

managing trade accounts receivable and trade payables.


Quality of working capital management: Q3/15 vs. previous year

9M/15 9M/14 change (%)

Trade Receivables Turnover 14.4 14.9 -3.4%

Inventory Turnover 6.9 5.3 30.0%

Trade Payables Turnover 5.5 3.9 43.5%



5. Outlook

a. Micro factors

The Group issued unaudited sales results for year 2015. Baltona Group generated in total PLN 430m in

core revenues (without minor revenues) with is an increase of 21% on y-o-y basis. The audited number

of total sales (and y-o-y increase) should be higher due to the fact that the Group also generates sales

from minor activity which is reported on quarterly basis.


We can observe solid growth in Food & Beverages segment, which is the most profitable the Group’s

business. Moreover, the Group achieved noticeable growth in Duty-Free and Travel Retail sales of PLN

16.5m (vs. December/14: PLN 15.4m). This result is crucial, and means that the Group’s main business

is growing besides social and political affairs in Europe (increase of level of terrorism in Europe,

especially in France and Belgium). The decrease in sales in B2B segment is a result of the Group’s

policy to cut areas which are least profitable. This should results in higher EBITDA margins in 2016.


The sales results in December includes the fact that the Group closed out the business in Krakow and

Katowice Airport. However, we can expect higher capacity of sales due to the application for license to

operate at airport in Bremen and extending contract at airports in Gdansk (larger space) and Katowice.

When we divide the Group’s business into three parts: Duty-Free & Travel Retail, B2B and Food and

Beverages, we can notice factors that should contribute to positive outlook for two of them:

- Duty-Free & Travel Retail segment should grow due to anticipated increase in passenger traffic

- Food and Beverages is the Group’s new business with high margins, initiated in 2012. The Group

is going to set up new outlets and benefit from anticipated increase in passenger traffic.

On the cost side, we can observe positive signals as the new management announced to continue strictly

controlling SG&A costs along with keeping financial costs lower by repayments of debt.

Core Sales split: as of December/2015 (not audited)

in PLNm 12M/2015 12M/2014 change (%)

Duty Free and Travel Retail 254.9 216.7 18%

B2B 44.5 33.8 32%

Food and Beverages 130.5 104.6 25%

Total 430 355 21%

Segments split in % of core sales: as of December/2015 (not audited)

in PLNm December/2015 December/2014 change (difference) (%)

Duty Free and Travel Retail 62% 50% 12%

B2B 26% 41% -15%

Food and Beverages 12% 8% 3%

Segments split of core sales in PLN : as of December/2015 (not audited)

in PLNm December/2015 December/2014 change (%)

Duty Free and Travel Retail 16.5 15.4 7%

B2B 3.2 2.6 25%

Food and Beverages 7.1 12.7 -44%

Total 27.0 30.8 -12%



There are also two risks that may have impact on lower levels of P&L. Firstly, there is outstanding debt

denominated in dollars and euro as of 30 Sept 2015. The impact on net income may be either positive

or negative in long term. Secondly, Polish Government may impose taxes on retail sales next year, but

the level of tax and how Baltona Group would be charged on, is not yet known. However, the tax does

not include retail sales of excise goods and the all goods that the government has a discretion over their

price. Therefore, the potential impact on the Group’s revenues is reduced as the Group’s products such

as cigarettes will not be impacted by this tax regulation.

b. Macro factors

Duty - free & travel retail (DFTR) is a global industry selling goods to travellers, which are exempt from

certain local or national taxes and excise duties, normally on the understanding the goods will be taken

out of the country. Airports represent the majority of such sales globally but duty - free & travel retail

is also available at border shops, onboard cruise & ferry vessels and onboard aircraft during international

travel, at international railway stations and in some non-EU countries at downtown stores where proof

of travel is required and at airport arrival shops.

The Group business is chiefly dependent on level of traffic at airports. Thus, the success of the Duty-

Free and Travel Retail industry is intrinsically linked to the rise of global aviation and tourism.

Air Traffic

According to Polish Civil Aviation Authority, the number of passengers serviced at Polish airports in

12M/2015 amounted to 30.5m (vs. 12M/14: 27.0m) can be translated to increase of 13%.

With regards to DFRT and F&B segment, the Baltona Group now fully operates at 5 Polish airports:

Warsaw-Modlin, Gdansk, Poznan, Bydgoszcz and Rzeszow, and has landside shops in Krakow and

Katowice. The table below presents statistics with regards to number of passengers (PAX) at the Polish

airports where the Group has been operating.

Source: Polish Airports, Dr. Kalliwoda International Research GmbH

We can observe massive increase of 21% y-o-y from 2014 to 2015 in PAX at the Group’s airports.

What’s more, the increase in PAX at the Group’s airports is higher than the overall increase of PAX at

PAX at Baltona Group's Airports

in '000 2014 2015 % change

Krakow 3 820 4 240 11%

Katowice 2 670 3 690 38%

Gdansk 3 304 3 700 12%

Warsaw-Modlin 1 703 2 588 52%

Poznan 1 442 1 500 4%

Rzeszow 603 645 7%

Bydgoszcz 289 341 18%

The Group's Total 13 830 16 704 21%

Poland Total 27 000 30 500 13%



Polish airports (21% vs. 13%). Additionally, it should be noted that the Poznan Airport had been

modernized for one month through September and October, thus the adjusted number of PAX should

be higher.

In terms of air passenger transport per inhabitants, Poland still lags behind the average of European

Union. According to Eurostat data as of the end of 2013, the average for EU-28 countries was 1.7, while

Poland reported less than 1.0 air passenger carried per inhabitant in 2013. Therefore, there is still room

for increase in air traffic from the side of Polish inhabitants.

In terms of global market, we can also observe stable growth of the number of passengers serviced at

airports (PAX). World passenger traffic continued to grow strongly by +6.3% y-o-y in November 2015.

All regions but Africa, posted a strong y-o-y growth in international passengers traffic.

Source: www.aci.aero, Dr. Kalliwoda International Research GmbH

The Passenger Load Factor “LF” (measures the capacity utilization of public transport services like

airlines, passenger railways, and intercity bus services. It assess how efficiently a transport provider

"fills seats" and generates fare revenue) reached 80.5% in October 2015, a significant improvement of

+1.4 percentage points from the LF recorded in the same period last year. Both international and

domestic LFs have improved.

Almost all regions posted positive growth in level of capacity (Available Seat-Kilometers - ASK) in

November 2015 y-o-y with a +4.2% increase in capacity worldwide.

Source: IATA (monthly traffic analysis), Dr. Kalliwoda International Research GmbH

**Available Seat-Kilometers (ASK) captures the total flight passenger capacity of an airline in kilometers. It is obtained by multiplying the

total number of seats available for scheduled passengers and the total number of kilometers those seats were flown.

PAX % y-o-y

International Passengers 6.1%

Domestic Passengers 6.5%

Total Passengers 6.3%

World PAX Summary - as of November 2015

Region PAX % y-o-y

Africa -9.2%

Asia-Pacific 8.2%

Europe 4.8%

Latin America/Caribbean 8.2%

Middle East 11.3%

North America 7.2%

World 6.1%

PAX Summary by Region - as of November 2015

Nov 2015 vs. Nov 2014 ASK % y-o-y

International 4.1%

Domestic 4.4%

Total Passengers 4.2%

World ASK** Summary y-o-y growth - as of November 2015



Duty-Free & Travel Retail sector

In terms of duty-free & travel retail sector there is also significant assumption that the market is

gaining positive momentum and the solid growth is anticipated in the future. According to the PWC

report ‚ Retail Sector: Global and Mexican highlights of the supermarket & hypermarket industry‘, duty

free retailers are among the top 5 fastest growing retail channels worldwide, ranked by the CAGR from

2013 to 2018 with 6.4%.

Moreover, other independent research houses also predict strong performance of duty-free retailers.

According to Conlumino report ‘Global Duty Free Retailing 2014 -2019, The current global market

value of the sector is estimated at $49bn (£31bn) and is set to produce growth of $25bn (£16bn) over

the next five years as the expansion of low cost airlines, larger aircraft, and more airports, increase the

number of international travellers. What’s more, it is argued that even mass market retailers are now

moving into the channel as they realise the potential of the high footfall, captive audience it generates.

We can expect that the expansion of low cost airlines, more airports and larger aircraft are making

international travel more accessible to developing countries and less affluent travellers. This factor

should attract regular retailers to the channel as well as luxury brands, as they may be tempted by its

huge potential to reach a high footfall, constantly changing, mass of shoppers. On one hand the

attractiveness of the market may increase competition at the market, on the other hand it shows huge

potential of the market.

The example of the market attractiveness is the latest acquisition of World Duty Free (WDF) by the

Durfy, announced in March, 2015. Dufry closed the acquisition of the 50.1% stake of World Duty

Free Group from Edizione for €1.31bn on August 2015. WDF had €970 in net debt and €260.5 million

in EBITDA at the end of 2014 making the enterprise value of the deal around $3.57 billion. The

EV/EBITDA multiple for the deal was around 13.7x, which is substantially higher that current and

predicted EV/EBITDA of Baltona Group (4.59x as of 17 January 2016 and 5.68x as of 2015E).

In spite of the increase in market attractiveness, there is a limited medium-term risk of the competition

to be visible at Polish airports, because there is relatively low level of interest from big players to show

up at airports below 5m - 10m of PAX.

If we assume, that crude oil prices hold at the level below $50, this should stimulate airlines to cut prices

and passengers to select airline as a more comfortable means of travel by instead of travel by train or

car.

Based on our detailed calculation we estimate that the number of passengers serviced at Baltona Group’s

airports should increase to 9.3%, which should contribute to 18% increase in total sales of the Group in

2016.



c. Summary of outlook

Our financial estimates for 2015E-2017E and for 2016E q/q


Following strong 1-3Q15, the decent 4Q/15 sales figures should not come as a surprise. Because of the

restructuring of the business, we do expect the four quarter of 2015 to bring in decrease in q-o-q sales

and on the other hand material q-o-q improvement of operating cash flows (be it for the sake of

differences in the base levels). Specifically, we are looking at approx. PLN 90m in sales for the group

and to a small degree negative net income.

On the other hand, in terms of sales, the Group plans to participate in applying for license at airports in

Bremen and extending contract in Gdansk and Katowice. With regard to Gdansk Airport, the success in

extending license will result in increase in current capacity at this airport that should translate into

significant increase of sales in 2016 - 2017.

Looking at the Group’s perspectives, we get the feeling that the Group seems to be managed in the right

direction. The Group focuses both on the top line improvement (increase in sales, introducing new

segments of business) and on the bottom line enhancement.

The bottom line enhancements plan assumes corporate reorganisation that focuses on:

- Optimisation of logistics process within the Group

- Optimisation of business segments – reduction of unprofitable segments

- Simplification of the organizational structure of the Group

The steps undertaken by the Group allow to increase in productivity of labour and make assets

utilisation higher. In results the corporate reorganisation should generate substantial increase in

profitability in 2016.

In our view total sales should constantly increase due growth in airports traffic and increase level of

consumption spending in Poland. Although long-term margins trend might go downwards due to

increase in competition, our study assumes strong, positive operating cash flows in 2016E and 2017E.

Our estimates 2015E-2017E

in PLNm 2015E 2016E 2017E

Net sales 436.1 514.6 540.3

EBITDA 16.88 24.01 29.00

EBITDA margin 3.9% 4.7% 5.4%

EBIT 10.08 17.12 21.76

EBIT margin 2.3% 3.3% 4.0%

Net income 6.58 11.23 14.97

Net margin 1.5% 2.2% 2.8%



We see some risks to the 2015 financials of Baltona Group such as: (i) USD strengthening vs. PLN

negatively affecting the net margin on sales, (ii) EUR strengthening vs. PLN increasing the rental costs.

We adjusted our estimates taking into account risks of a.) global terrorist threat, with consequent

potential decrease in sales, and b.) the concrete risk of an increase in competition both in domestic and

international markets. We remained cautious in terms of the rapid development of the corporate demand

in B2B segment.

On the other hand, the Polish economy expansion should positively affect the LFL sales development

at consumer sentiment driven companies in the high-end part of the market. What’s more, the corporate

restructuring should position the Group very competitive to capture a hefty share of the European market

in duty-free & travel retail. Although we may not see effects of this strategy in the short term, the Group

has been growing as a corporate in our view.

As a final sum-up, we see that there is a huge turnaround in the Group’s business model and quality of

management. The turnaround started in 2011, through changes in shareholders structure and starting of

international expansion. Soon after, the Group lost the most important contract at Warsaw-Chopin

Airport. Nonetheless, such a big loss was seemingly a driver to conduct further top and bottom line

enhancements. The Group started to introduce new segments of business (B2B and Food and Beverages)

and has undertaken the corporate reorganisation in positive direction. In result, the current financials

(EBITDA PLN 15.5m, up 128% y-o-y) indicate that the Group’s turnaround is likely to materialize in

near term.

In our opinion, the Group’s sales growth, deliberate and well-knit long-term strategy, debt reduction,

strong cash-flow along with the convincing growth in airport traffic are strong support for good direction

of stable, organic development of the Group with proper sales management and cost structure on hand.

We initiate our coverage of Baltona Group with a Buy rating.



5. Shareholder Structure and market price development

Shareholder Structure

Market price development (relative to WIG index)




6. Financials

Profit and loss statement

in PLNm 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Revenues 182.67 245.49 364.66 436.08 514.57 540.30 571.64 611.66 660.59 720.04

Cost of goods sold -120.64 -160.67 -236.92 -292.00 -347.34 -362.00 -377.28 -403.69 -435.99 -475.23

Gross profit 62.04 84.82 127.75 144.08 167.24 178.30 194.36 207.96 224.60 244.81

Other operating income -6.89 -8.31 -10.20 -10.70 -11.24 -11.80 -12.39 -13.01 -13.66 -14.34

Personnel costs -15.76 -23.48 -38.27 -42.40 -48.63 -51.06 -54.02 -57.80 -62.43 -68.04

Other operating expenses -40.20 -51.52 -69.90 -74.10 -83.36 -86.45 -91.46 -97.86 -105.69 -115.21

EBITDA -0.81 1.50 9.38 16.88 24.01 29.00 36.49 39.29 42.82 47.22

Depreciation -7.15 -5.10 -6.62 -6.80 -6.90 -7.24 -7.66 -8.20 -8.85 -9.65

Operating income -7.96 -3.60 2.76 10.08 17.12 21.76 28.83 31.09 33.97 37.58

Net financial result -0.94 -1.28 -5.98 -3.00 -3.25 -3.27 -3.29 -3.31 -3.33 -3.35

EBT -8.90 -4.88 -3.21 7.08 13.87 18.49 25.54 27.78 30.64 34.23

Income taxes 0.40 -1.21 -0.45 -0.50 -2.63 -3.51 -4.85 -5.28 -5.82 -6.50

Net income / loss -8.49 -6.09 -3.67 6.58 11.23 14.97 20.69 22.51 24.82 27.72

EPS 0.27 -0.54 -1.07 0.58 0.92 1.22 1.69 1.84 2.03 2.26

DPS 0.00 0.00 0.00 0.00 0.64 0.86 1.18 1.29 1.42 1.58

Change y-o-y

Revenues n.a 34.39% 48.55% 19.58% 18.00% 5.00% 5.80% 7.00% 8.00% 9.00%

Cost of goods sold n.a 33.18% 47.46% 23.25% 18.95% 4.22% 4.22% 7.00% 8.00% 9.00%

Gross profit n.a 36.73% 50.61% 12.78% 16.07% 6.62% 9.01% 7.00% 8.00% 9.00%

Other operating income n.a 20.72% 22.67% 4.91% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Personnel costs n.a 48.98% 62.95% 10.80% 14.69% 5.00% 5.80% 7.00% 8.00% 9.00%

Other operating expenses n.a 28.18% 35.67% 6.01% 12.50% 3.70% 5.80% 7.00% 8.00% 9.00%

EBITDA n.a -285.43% 524.70% 79.90% 42.26% 20.75% 25.84% 7.68% 8.99% 10.28%

Depreciation n.a -28.71% 29.86% 2.73% 1.40% 5.00% 5.80% 7.00% 8.00% 9.00%

Operating income n.a -54.84% -176.88% 264.69% 69.82% 27.09% 32.51% 7.86% 9.25% 10.61%

Net financial result n.a 37.33% 365.58% -49.82% 8.33% 0.62% 0.61% 0.61% 0.60% 0.60%

EBT n.a -45.15% -34.13% -320.29% 95.88% 33.30% 38.15% 8.79% 10.29% 11.70%

Income taxes n.a n.a -62.68% 10.62% 426.99% 33.30% 38.15% 8.79% 10.29% 11.70%

Net income / loss n.a -28.29% -39.80% -279.49% 70.72% 33.30% 38.15% 8.79% 10.29% 11.70%

EPS n.a n.a 97.77% -154.63% 56.79% 33.30% 38.15% 8.79% 10.29% 11.70%

Share in total sales

Revenues 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 101.00 % 102.00 % 103.00 % 104.00 %

Cost of goods sold -66.04 % -65.45 % -64.97 % -66.96 % -67.50 % -67.00 % -66.00 % -66.00 % -66.00 % -66.00 %

Gross profit 33.96 % 34.55 % 35.03 % 33.04 % 32.50 % 33.00 % 34.00 % 34.00 % 34.00 % 34.00 %

Other operating income -3.77 % -3.39 % -2.80 % -2.45 % -2.18 % -2.18 % -2.17 % -2.13 % -2.07 % -1.99 %

Personnel costs -8.63 % -9.57 % -10.49 % -9.72 % -9.45 % -9.45 % -9.45 % -9.45 % -9.45 % -9.45 %

Other operating expenses -22.00 % -20.99 % -19.17 % -16.99 % -16.20 % -16.00 % -16.00 % -16.00 % -16.00 % -16.00 %

EBITDA -0.44 % 0.61 % 2.57 % 3.87 % 4.67 % 5.37 % 6.38 % 6.42 % 6.48 % 6.56 %

Depreciation -3.91 % -2.08 % -1.82 % -1.56 % -1.34 % -1.34 % -1.34 % -1.34 % -1.34 % -1.34 %

Operating income -4.36 % -1.46 % 0.76 % 2.31 % 3.33 % 4.03 % 5.04 % 5.08 % 5.14 % 5.22 %

Net financial result -0.51 % -0.52 % -1.64 % -0.69 % -0.63 % -0.61 % -0.58 % -0.54 % -0.50 % -0.47 %

EBT -4.87 % -1.99 % -0.88 % 1.62 % 2.70 % 3.42 % 4.47 % 4.54 % 4.64 % 4.75 %

Income taxes 0.22 % -0.49 % -0.12 % -0.11 % -0.51 % -0.65 % -0.85 % -0.86 % -0.88 % -0.90 %

Net income / loss -4.65 % -2.48 % -1.01 % 1.51 % 2.18 % 2.77 % 3.62 % 3.68 % 3.76 % 3.85 %

Dr. Kalliwoda | Research © 2016

Fiscal year

Profit and loss statement



Balance sheet

in PLNm 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Assets

Cash and equivalents 2.93 6.72 7.71 8.75 5.12 7.77 5.18 7.82

Trade accounts and notes receivables 12.71 16.89 21.47 23.68 28.84 26.53 32.59 30.22

Inventories 16.63 32.43 36.72 35.00 55.54 58.32 61.70 66.02

Other current assets 0.94 0.99 0.25 0.50 0.35 0.37 0.39 0.41

Current assets, total 33.21 57.03 66.15 67.93 89.85 92.99 99.86 104.48 Property, plant and equipment 11.91 22.64 20.18 16.43 17.49 19.32 21.54 25.38

Other intangible assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Goodwill 0.67 7.98 8.32 8.78 9.22 9.68 10.16 10.67

Other long-term assets 2.35 3.68 3.70 2.40 4.71 4.41 4.09 3.77

Deferred tax assets 0.00 0.00 0.00 1.60 0.00 0.00 0.00 0.00

Non-current assets, total 14.93 34.30 32.20 29.21 31.42 33.40 35.79 39.82

Total assets 48.14 91.33 98.35 97.14 121.27 126.39 135.65 144.29

Liabilities

Trade payables 25.81 39.49 44.45 38.00 58.31 59.96 63.55 65.79

Other short-term liabilities 0.86 2.05 2.65 4.00 5.15 5.40 5.72 6.12

Short-term financial debt 3.98 9.04 17.83 18.50 18.13 17.77 17.77 17.77

Pension provision 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Provisions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Current liabilities, total 30.65 50.58 64.93 60.50 81.59 83.13 87.03 89.67

Long-term financial debt 0.00 22.99 21.38 17.50 16.50 15.50 14.50 13.50

Other long-term liabilities 0.69 5.15 4.10 4.90 5.78 6.07 6.42 6.87

Deferred tax liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Long-term liabilities, total 0.69 28.13 25.48 22.40 22.28 21.57 20.92 20.37

Total liabilities 31.34 78.71 90.41 82.90 103.87 104.70 107.96 110.04

Shareholders equity, total 16.86 12.36 6.50 13.00 16.37 20.86 27.07 33.82

Minority interests -0.06 0.26 1.44 1.24 1.03 0.83 0.63 0.43

Total liabilities and equity 48.14 91.33 98.35 97.14 121.27 126.39 135.65 144.29


Balance sheet - Baltona S.A.

Fiscal year



Cash flow statement

Financial ratios


in PLNm 2012 2013 2014 2015E 2016E 2017E

Net income / loss -8.5 -6.1 -3.7 6.6 11.2 15.0

Depreciation 4.1 5.1 6.6 6.8 6.9 7.2

Change of working capital 7.0 3.4 -4.0 -5.8 -4.1 1.4

Others 2.8 1.6 5.2 -1.6 1.6 0.0

Net operating cash flow 5.4 4.0 4.1 5.9 15.6 23.6

Cash flow from investing -2.3 -20.9 -4.5 -3.5 -8.4 -9.5

Free cash flow 3.1 -16.9 -0.4 2.4 7.2 14.1

Cash flow from financing -1.7 15.8 -7.4 15.6 -10.9 -11.5

Change of cash 1.4 -1.1 -7.7 18.1 -3.6 2.7

Cash at the beginning of the period -1.9 -0.5 -1.6 -9.3 8.8 5.1

Cash at the end of the period -0.5 -1.6 -9.3 8.8 5.1 7.8


Cash flow statement - Baltona S.A.

Fiscal year

Fiscal year 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Gross margin 34.0% 34.6% 35.0% 33.0% 32.5% 33.0% 34.0% 34.0%

EBITDA margin -0.4% 0.6% 2.6% 3.9% 4.7% 5.4% 6.4% 6.4%

EBIT margin -4.4% -1.5% 0.8% 8.0% 12.0% 15.3% 17.5% 19.4%

Net margin -4.6% -2.5% -1.0% 1.5% 2.2% 2.8% 3.6% 3.7%

Return on equity (ROE) -50.4% -41.7% -38.9% 67.5% 76.5% 80.4% 86.3% 73.9%

Return on assets (ROA) -15.7% -5.3% 2.4% 9.9% 11.9% 14.4% 17.7% 17.9%

Return on capital employed (ROCE) -43.5% -11.0% 9.4% 23.9% 34.9% 40.7% 48.0% 46.1%

Equity ratio 35.0% 13.5% 6.6% 13.4% 13.5% 16.5% 20.0% 23.4%

Current ratio 1.08 1.13 1.02 1.12 1.10 1.12 1.15 1.17

Quick ratio 0.51 0.47 0.45 0.54 0.42 0.41 0.43 0.42

Net interest cover -8.51 -2.80 0.46 3.36 5.27 6.65 8.76 9.39

Net debt/EBITDA -2.15 20.27 3.79 1.90 1.47 1.09 0.92 0.77

Tangible BVPS 1.44 0.39 -0.16 0.37 0.58 0.91 1.38 1.89

CAPEX/Sales n.a 9.42% 1.23% 0.81% 1.63% 1.76% 1.81% 2.05%

Working capital/Sales 1.98% 3.57% 3.11% 3.94% 4.13% 3.67% 4.45% 4.05%

EV/Sales 0.53 0.39 0.26 0.22 0.19 0.18 0.17 0.16

EV/EBITDA -118.40 63.85 10.22 5.68 3.99 3.31 2.63 2.44

EV/EBIT -12.05 -26.68 34.70 9.51 5.60 4.41 3.33 3.08

P/Tangible BVPS 4.24 15.69 -37.85 16.27 10.46 6.69 4.42 3.23

P/E 22.59 -11.27 -5.70 10.43 6.66 4.99 3.61 3.32



8. Contact

Primary Research │Fair Value Analysis │International Roadshows

Arndtstr. 47

60325 Frankfurt

Tel.: 069-97 20 58 53

Fax: 069-13 81 92 15

www.kalliwoda.com

Head/CEO:


E-Mail: [email protected]

CEFA-Analyst; University of

Frankfurt/Main; PhD in Economics;

Dipl.-Kfm.

Sectors: IT, Software,

Electricals & Electronics,

Mechanical Engineering,

Logistics, Laser, Technology,

Raw Materials

Dr. Peter Arendarski


Senior-Analyst, Msc & Ph.D in Finance

(Poznan Univers. of Economics),CFA

Level 3 Candidate

Sectors: Technology, Raw

Materials, Banks &

Insurances, Financial-

Modelling (Quant., Buyside)

Patrick Bellmann


Junior-Analyst; WHU - Otto

Beisheim School of Management,

Vallendar

Sectors: Support Research

and Quantitative Approach

Michael John


Dipl.-Ing. (Aachen) Sectors: Chemicals, Chemical

Engineering, Basic Metals,

Renewable Energies,

Laser/Physics

Olaf Köster


Dipl.-Betriebswirt, EBS Sectors: Renewable

Energy/Technology

Christoph Löffel


Bachelor Betriebswirtschaftslehre

Universität Mannheim

Sectors: Financials, Real

Estate

Dr. Christoph Piechaczek


Dipl.-Biologist; Technical University

Darmstadt; Univ. Witten-Herdecke.

Sectors: Biotech &

Healthcare; Medical

Technology Pharmaceutical

Dario Maugeri


Master of Science in Corporate Finance;

Rotterdam School of Management

Sectors: Automotive,

Technology




Nele Rave


Lawyer; Native Speaker, German

School London,

Legal adviser

Hellmut Schaarschmidt;


Dipl.-Geophysicists; University of

Frankfurt/Main.

Sectors: Oil, Regenerative

Energies, Specialities

Chemicals, Utilities

Dr. Erik Schneider


Dipl.-Biologist; Technical University

Darmstadt; Univ. Hamburg.

Sectors: Biotech &

Healthcare; Medical

Technology Pharmaceutical

Hans-Georg Sutter


Dipl.-Wirtschaftsingenieur University

Kaiserslautern

Sectors: IT/e-commerce

Rainer Wochele


Bachelor of Science in Economics and

Business Administration (Goethe

University Frankfurt M.)

Junior-Analyst

Also view Sales and Earnings

Estimates:

DR. KALLIWODA │ RESEARCH

on Terminals of Bloomberg,

Thomson Reuters, vwd group and

Factset

Dr. Norbert Kalliwoda, CEFA




Essential information, disclosures and disclaimer

Essential information, disclosures and disclaimer

A. Essential information

The investments in financial instruments and securities (e.g. equities, bonds) generally involved on high

risks. It is possible that the investors lose some or all of the invested money. Potential investors should

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B. Disclosures according to Section 34b of the German Securities Trading Act (WpHG) and to the

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INTERNATIONAL RESEARCH GmbH.

II. Additional Information:

1. Sources of information:

Essential sources of information for the compilation of this document are publications from domestic

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Within the scope of the evaluation of companies the following valuation methods are applied: Multiple-

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DR. KALLIWODA INTERNATIONAL RESEARCH GmbH uses the following rating model:

BUY: Based on our analysis, we expect the stock to appreciate and produce a total

return of at least 10% over the next twelve months

ACCUMULATE: Based on our analysis, we expect the stock to appreciate and produce a total

return between 5%- 10% over the next twelve months

HOLD: Based on our analysis, we expect the stock to produce a total return between

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REDUCE: Based on our analysis, we expect the stock to cause a negative return

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SELL: Based on our analysis, we expect the stock to cause a negative return

exceeding -10% over the next twelve months

3. Date of first publication of this document: 12th of August 2015

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Rekomendacja Baltona

Economy & Finance

Transcript of Rekomendacja Baltona