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Flight Centre Video



 

Stock Of The Day - Flight Centre (HOLD)

Flight Centre Travel Group Ltd (ASX: FLT) was featured in the February 2015 issue of Forbes Asia considering the insights that the group now dominates the travel agency business in Australia with a 40% market share and 1400 stores located in most major malls and high streets. It now operates in more than 10 overseas countries China, the UK, the US and Singapore. In FY 2014, revenues of more than $2 billion were generated on travel business in excess of $13 billion resulting in a net profit of $190 million. Significantly, it has prospered while many of its competitors have been ravaged by the Internet but FLT is quick to point out that the Internet has been major competition for the last two decades and that it offers a blended model including a website for online bookings. However, the major strategy has been to expand into corporate travel, leisure travel and other services such as accommodation all of which offer higher margins. Geography and brand diversity are an integral part of the strategy.

With regards to the results for the half-year ended 31 December 2014, TTV has grown by 8.8% from $7.48 billion to $8.13 billion resulting in a 4.6% increase in revenues from $1.05 billion to $1.10 billion. Net margin has declined by 30 basis points from 2% to 1.7% and, consequently, underlying profit before tax has declined 5.9% from $146.3 million to $137.6 million and actual profit after tax by 9% from $155 million to $141 million. There has been no increase in the interim dividend payment which remains at 55 cents per share.


Year-to-Date Results Summary (Source: Company Reports)

Record sales were reported with new milestones being established for each one of the 10 geographical regions of operations. Growth in overseas markets contributed strongly to profits with the UK, China, Singapore and South Africa all reporting record profits. Business in Australia was affected by a difficult business environment and, despite an increase in sales, profits were unable to touch the record figure of FY 2014. Shop growth at 4% was just below the target figure and new hyper stores were launched in Australia, USA, India and Abu Dhabi. Management guidance for the full year FY 2015 are at a target of $360 million to $390 million for underlying PBT because of the opportunities for accelerated growth in the second half and early signs of a recovery in Australia.

The portfolio of global cash and cash equivalents exceeded $1 billion at December 31 2014 and included $429.4 million in company cash (previous year: $401.9million). Debt amounts to $31.9million (previous year: $44.6million) at the end of the period and the group produced its overall interest costs by repaying $19 million in borrowings in India. The company finished the half year with a positive net debt of $397.5 million compared to $357.3 million in the previous year. Cash flow followed its typical, seasonal cycle amounting to a $68.1 million operating cash outflow during the first half (previous year: $124.5 million outflow).This lower outflow was largely because of the normal airline payment cycle's (BSP) timing in both periods which meant that the company had a larger accumulation of cash on 31 December 2014 because of the payments due to airlines. The dividend of $0.55 per share was in line with the dividend of the previous year and represents a payout of 55.2% of actual NPT.


Results by Country (Source: Company Reports)

Generally speaking, profits were in line with the previous year though leisure profits were lower than expected. This was because of reduced margins to stimulate sales to consumers, softer overall demand and increased investments and wage increases. Strategies to improve the position include further vertical integration and new product development, more effective marketing and traveller engagement and enhanced productivity measures. Company priorities include generating better quality enquiries, refocusing the role of consultants, fine tuning product strategies and developing websites to completely complement the bricks and mortar business.


 Theme (Source: Company Reports)

The company has recently announced for an acquisition in Mexico in which it is acquiring a corporate travel management business named Koch Overseas de Mexico. The Mexican business has, since 2006, operated as an independent corporate travel licensee and this step forward to full ownership expands the presence in the Americas. It would be fair to say that the corporate travel business has proved to be remarkably robust and advances in technology such as videoconferencing have not really had a negative impact on business travel.



Overseas 1H TTV and EBIT (Source: Company Reports)
 
It is true that the long-term fundamentals of the company are sound even though the current P/E ratio is slightly higher than the average for the S&P/ASX 200 index. Operations have continued to be profitable though margins and earnings are under pressure. The balance sheet is strong and the net debt position shows a positive cash position of just under $400 million. However, we see that the future earnings are also dependent on the recovery of the Australian and the global economy. Accordingly, any great upside is only expected with the improvement in the economy as of now.


FLT Chart (Source - Thomson Reuters)
 
We are therefore classifying the stock as a Hold at the current price of $44.96.