Flight Centre downgrade
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 24 June 2015, 9:03 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
The rate of decline in the Australian operations during the 2H15 is a
concern given FLT was cycling a weak comp and it is the seasonally
stronger period.
The reversion of earnings back to long term average
outbound travel growth rates (+GDP) plus the fact that competition is
now impacting FLT's market share, cautions us on a near term
positive investment view despite what appears a reasonable valuation.
2H15 is worse than expected
FLT previously expected earnings growth in the 2H15 as it had weak comps to
cycle following the budget slump in the pcp. However this hasn't been the case.
The rate of the 2H15 decline is concerning, particularly for its key profit centre
(Australia), where we forecast EBIT to decrease 14% on the pcp, even greater
than the 1H15 (EBIT fell 10% on the pcp).
In FY15, FLT has been impacted at
all levels – subdued TTV growth from a tough consumer environment and lost
market share, revenue margin contraction and a higher cost base. Of most
concern in yesterday’s announcement was the lost market share from consumers
booking directly through the LCCs (low cost carriers), online agents and Airbnb.
On a positive
note, the majority of the offshore operations are performing well, particularly
the US and UK. The strength of operating cashflow was another highlight.
FY15/16/17 NPBT forecasts have fallen by 7.3%/8.6%/9.2%
Our new FY15 NPBT forecast is at the mid-point of guidance or A$360.0m,
down 4.4% from last year (FY14 was A$376.5m).
Moving forward, we have
taken a more conservative view on Australian outbound travel demand as it is
not expected to grow at the high single digit rates it achieved over the last
decade. We are also cognisant of increasing competition. This environment will
put more pressure on FLT’s offshore operations to perform strongly.
We also
think there is an opportunity for FLT to review its cost base. With a strong
balance sheet, further bolt-on acquisitions are likely over capital management.
Recommendation
The rate of the 2H15 decline in Australia and the increased competition see us
move to a Hold recommendation. Morgans clients should login to view our target price.
Despite short term headwinds, we would
become buyers of FLT under A$35.50 as we believe that the company is well
placed over the medium to longer term as its transforms from a travel agent to
a world class travel retailer and benefits from the golden era of travel – cheap
airfares; more airline choice; greater comfort; and less flying time.
More information
Morgans clients can login to view the full report on Flight Centre Travel (FLT). Alternatively, please contact your nearest Morgans office for access.
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