Company Overview - Flight Centre Travel Group Ltd, formerly Flight Centre Limited is an Australia-based company. The Company is engaged in travel retailing, wholesaling and corporate travel management. The Company operates in five geographical segments: Australia, United States, United Kingdom, rest of world and other segment. The Company's brands include FCm Travel Solutions, Corporate Traveller, Escape Travel, Student Flights, Travel Associates, Cruiseabout, Liberty Travel, CiEvents, Stage & Screen, Campus Travel and Travel Club Gateways. The Company's subsidiaries include Australian OpCo Pty Ltd, Escape Travel Franchising Pty Ltd, Flight Centre (China) Pty Ltd, Flight Centre Property Pty Ltd, Flight Centre Technology Pty Ltd, Flight Centre Office Trust and Moneywise Global Home Loans Pty Ltd.
Analysis - The market expects FLT’s 1H15 PBT of $138.9m in consensus with the guidance of $136-142m. FLT is a quality business, although near-term cyclical risk in view of soft consumer confidence prevails. The 1H15 Total Transaction Value of $7,894m which is an increase of 6% on pcp is expected. The Company is expected to declare a fully franked interim dividend of 48.5cps with a normalised payout ratio of 50%. Weak consumer confidence with pitiable enquiry levels has driven flatness in the outbound and domestic Australian leisure travel market. However, FLT’s approach of lowering service fees in view of pricing of products appears to bring a sigh of relief. This would be resulting in margin compression. There is an increase in cost base although return on investment has not been taken into account. An estimated investment rise in areas of the cost base including wages, sales and marketing costs has been indicated by FLT. This is not expected to result in a lift in TTV. Nonetheless, the total FY15 TTV is expected to increase by 6% despite growing 7% in FY15 to the AGM date. 50% growth on pcp is expected from the US with a view to have FY15 EIBT of US$17-18m. The impact on earnings owing to seasonal developments is expected to be reduced. Then business is expected to grow to 1.0bn GBP by FY15 and 1.5bn GBP by FY17 in the UK. The ~1% market share is expected to grow further. Of course, more clarity is to be sought through the interim results pending to be out in February 2015.
Global Footprint (Source – Company Reports)
The Company has been able to illustrate some level of risk aversion to currency fluctuations in view of the increased leisure sales from Australia to the US. The rate of growth has surpassed overall ticket growth rate in Australia thereby expanding the US share of the outbound leisure market. There are no changes as to domestic tickets as a proportion of total tickets in Australia.
FLT has $476m of net cash which may be utilized for strategic acquisition opportunities with regards to businesses for a vertical integration. FLT may also increase the payout ratio in the medium to longer-term from its current policy of returning 50-60% of underlying NPAT to shareholders.
Products (Source – Company Reports)
In December 2014, FLT reported that it was witnessing 3-10% reduction to FY15 PBT and a 3-7% reduction to 1H15 PBT. This has been primarily due to a slowdown in Australian leisure sales with TTV up only 2% as opposed to a 10% CAGR over the past five years. On the other hand, performance with regards to the offshore businesses, predominantly the US, has been outstanding when looking at what was expected. Given the economic conditions then, FLT lowered FY15 PBT guidance from $395-405m to $360-390m which indicated about 7% downgrade. The bottom end of guidance represented a ~10% downgrade. Thus, the 1H15 PBT which was expected to be $136-142m is down 3-7% on the pcp, primarily driven by Australian leisure. While the consumer confidence was weak and led to a decline in leisure sales and faintly lower margins owing to decreased service fees, the override targets remained unharmed. The Company conveyed that the overall leisure travel market remained flat with 2% lift in Australian leisure TTV in FY15 in Dec’ 15 on pcp. Stability was noticed for the corporate market. However, Asia is not by the side given decline in capacity growth and yield.
A good proposition is likely to come up for FLT given the fact that Virgin and Qantas have recently announced for removal of fuel surcharge with Qantas showing an intention to absorb the same into base international fares. Fuel surcharges are generally not known to contribute towards super override targets and percentage commissions on the same are lower than base fares as earned by travel agents such as FLT. Therefore, in case the agency agreements changes remains as such then the action by Qantas will help FLT earn higher rates of commission. Nonetheless, renegotiations to limit the upside for commission rates are expected. Also, with the removal of the fuel surcharges, transparency and probability around commissions and override targets is expected to improve and can even better the demand in the current turbulent environment based on oil price-driven fare reductions. The removal of the fuel surcharge may even result in a TTV opportunity from Qantas of about $756m in FY16. Further, an EBIT raise of about $13m per effective store given a conservative total market view is expected.
Corporate Brand Diversity (Source – Company Reports)
On 30 January 2015, FLT also announced about Virgin Australia’s decision to remove fuel surcharges. As per the Company, the surcharge removal would benefit Australian leisure and corporate travelers, members of the airline’s Velocity program in short-term as well as in long-term. The announcement indicated that Virgin Australia which is a major national and international carrier has eliminated fuel surcharges and reverted to the traditional system of including all operating costs in the base fare. As a result, a cleaner and transparent fare structure could be available. This would also deliver instant benefits to customers in the form of cheaper fares for travelers taking off to the United States. Irrespective of the submissive capacity environment to end FY15, revenue growth for FLT may be driven by fuel surcharges which are expected to be rolled-off into end FY15. Capacity moderation is also estimated to stay from domestic standpoint and a good upside to FLT is expected given the superior upside from a yield growth perspective.
Primarily, there are long-term growth prospects for FLT given various attributes including growth at GDP-like rates in Australia, capability to uphold margins and progress with regards to global expansion including footprints in the UK and US. The long term fundamentals look good although a turbulent phase from the economic cycle is being witnessed as of now. This is also dependent on consumer confidence. The risk factors to be wary of include unfavorable foreign exchange movements, uncomplimentary changes in the level of online promotions by hotels and airlines, critical fluctuations in domestic and global travel spending, soft consumer confidence in Australia, failure to execute growth strategies and so forth. In spite of the fact that tough conditions may prevail for the next 3-6 months, the performance beyond this uncertainty may bring value.
FLT Daily Chart (Source - Thomson Reuters)
Accordingly, we put a BUY recommendation for this stock at the current price of $35.25.
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