Company Reports

No-moat Flight Centre’s fiscal 2024 profit before tax, or PBT, of AUD 320 million came in at the middle of management’s guidance range. However, revenue of AUD 2.7 billion missed our estimate by 8%, mostly due to lower-than-forecast revenue margins in the US and Europe segments.

A wave of covid-19-induced damages has been inflicted on Flight Centre since March 2020. Restrictions on travel and border control, grounding of airline capacity, and strict lockdown measures on consumers created an unprecedented squeeze on the group. However, the measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 697 million equity capital raising in April 2020 and the subsequent rapid recovery in travel activities, have stabilized the no-moat-rated group. And recovery to prepandemic level of earnings is on track.

Shares in Flight Centre are trading in line with our AUD 21 per share fair value estimate. However, they remain volatile due to perceptions of the group as a leisure-centric travel intermediary. That isn't surprising, given Flight Centre’s roots and the brick-and-mortar-fueled brand strength. At its peak in 2019, it had more than 1,600 shops in Australia and 1,200 overseas.

A wave of covid-19-induced damages has been inflicted on Flight Centre since March 2020. Restrictions on travel and border control, grounding of airline capacity, and strict lockdown measures on consumers created an unprecedented squeeze on the group. However, the measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 697 million equity capital raising in April 2020 and the subsequent rapid recovery in travel activities, have stabilized the no-moat-rated group. And recovery to prepandemic level of earnings is on track.

A wave of covid-19-induced damages has been inflicted on Flight Centre since March 2020. Restrictions on travel and border control, grounding of airline capacity, and strict lockdown measures on consumers created an unprecedented squeeze on the group. However, the measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 697 million equity capital raising in April 2020 and the subsequent recovery in travel activities, have stabilized the no-moat-rated group. And recovery to prepandemic level of earnings is on track.

A wave of covid-19-induced damages has been inflicted on Flight Centre since March 2020. Restrictions on travel and border control, grounding of airline capacity, and strict lockdown measures on consumers created an unprecedented squeeze on the group. However, the measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 697 million equity capital raising in April 2020 and the subsequent recovery in travel activities, have stabilized the no-moat-rated group. And recovery to prepandemic level of earnings is on track.

We lift our fair value estimate for Flight Centre by 5% to AUD 21 per share, reflecting continuing near-term earnings recovery that is outpacing our prior expectations.

A wave of COVID-19-induced damages has been inflicted on Flight Centre since March 2020. Restrictions on travel and border control (international, domestic), grounding of airline capacity and strict lockdown measures on consumers have created an unprecedented squeeze on the group. However, the measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 697 million equity capital raising in April 2020 and the subsequent recovery in travel activities, have stabilized the no-moat-rated group. And recovery to prepandemic level of earnings is on track.

We lift our fair value estimate on Flight Centre by 5% to AUD 20 per share. The strong turnaround in fiscal 2023 underlying EBITDA to AUD 302 million, from a loss of AUD 183 million, was as recently guided. However, the 126% jump in revenue to AUD 2.3 billion was 9% ahead of our expectations, reflecting a higher-than-expected yield on the AUD 21.9 billion in total transaction value, or TTV, which more than doubled.

Twelve months on from when coronavirus first hit our shores, no moat-rated leisure shares have all rallied strongly to be at or above our intrinsic assessments. Ardent Leisure is up 343% to AUD 0.93 (versus our AUD 0.55 fair value estimate), Event Hospitality is up 50% to AUD 11.23 (AUD 11.20 fair value estimate) and Flight Centre is up 98% to AUD 17.63 (AUD 18.00 fair value estimate). The recovery trade has been buoyed by easing pandemic fears, the gradual vaccine rollout and an accommodative equities market.

A tidal wave of COVID-19-induced damages has been inflicted on Flight Centre since late March 2020. Government restrictions on travel (international, domestic), effective grounding of airline capacity and strict lockdown measures on consumers have created an unprecedented liquidity squeeze on the group. We believe the measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the current malaise.

We see no reasons to finesse our fiscal 2021 forecasts following Flight Centre's fiscal 2021 first half underlying pre-tax loss of AUD 184 million, from AUD 82 million profit a year ago. While it may make our unchanged AUD 231 million pre-tax loss projection for the full year seem wishful, our intrinsic assessment of the group does not hinge on the current COVID-19-impacted fiscal 2021. Rather, it depends on whether Flight Centre has enough liquidity to survive the current malaise and live to see a return to pre-tax profit which we project reaching the pre-COVID-19 level by fiscal 2024 (AUD 335 million versus AUD 343 million in fiscal 2019).

A tidal wave of COVID-19-induced damages has been inflicted on Flight Centre since the middle of March 2020. Government restrictions on travel (international, domestic), effective grounding of airline capacity and strict lockdown measures on consumers have created an unprecedented liquidity squeeze on the group. We believe the measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the current malaise.

A tidal wave of coronavirus-induced damages has been inflicted on Flight Centre since the middle of March 2020. Government restrictions on travel (international, domestic), effective grounding of airline capacity and strict lockdown measures on consumers have created an unprecedented liquidity squeeze on the group. We believe the measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the current malaise.

We maintain our fair value estimate for Flight Centre at AUD 33.00 per share following the soft fiscal 2016 result; at the current market price of AUD 36.43, shares remain overvalued. We still believe the company lacks an economic moat, given the highly competitive nature of the travel retailing market and a lack of sustainable competitive advantages. We also maintain our high fair value uncertainty rating, which is influenced by relatively high operating leverage.

Flight Centre is one of the world's largest travel agents, but still generates over 70% of its earnings in Australia. Unrivaled scale and brand strength in the domestic travel market has delivered buying power and pricing flexibility that resulted in returns on capital consistently above 20%. Flight Centre has a strong network of services, which has driven solid end-user traffic and bookings over the last 20 years, but we do not believe this is sufficient to protect the company against online competitors over the next 10 years.

Flight Centre is one of the world's largest travel agents, but still generates over 70% of its earnings in Australia. Unrivaled scale and brand strength in the domestic travel market has delivered buying power and pricing flexibility that resulted in returns on capital consistently above 20%. Flight Centre has a strong network of services, which has driven solid end-user traffic and bookings over the last 20 years, but we do not believe this is sufficient to protect the company against online competitors over the next 10 years.

We maintain our fair value estimate for Flight Centre at AUD 33.00 per share following Britain's vote in favour of the United Kingdom leaving the EU. At the current market price of AUD 29.32, the shares are 10% below our fair value estimate. We expect this discount to narrow as financial results are announced and concerns regarding Brexit dissipate. The shares trade on undemanding fiscal 2017 financial metrics including a P/E ratio of 13 times, a gross dividend yield including franking credits of 6.6%, and a net yield of 4.6%. We maintain our view the company lacks an economic moat.

Flight Centre is one of the world's largest travel agents, but still generates over 70% of its earnings in Australia. Unrivaled scale and brand strength in the domestic travel market has delivered buying power and pricing flexibility that resulted in returns on capital consistently above 20%. Flight Centre has a strong network of services, which has driven solid end-user traffic and bookings over the last 20 years, but we do not believe this is sufficient to protect the company against online competitors over the next 10 years.

We have cut our fair value estimate for Flight Centre by 18% to AUD 33.00 per share following a cut in guided fiscal 2016 earnings, which implies an outlook for earnings to fall rather than grow. The lower fair value estimate follows a recent change in analyst and review of our discounted financial model. We intend to increase the detail of the model and bullish and bearish scenarios over the coming months. At the current share price of AUD 33.55, the shares are fairly valued, implying a fiscal 2017 P/E ratio of 13.7 times versus around 16 times for the S&P/ASX 200 Index. The fiscal 2017 dividend yield is 4.4% or 6.3% with franking credits, representing a payout ratio of 60%.