1H19 and full year guidance disappoints
Both FLT's 1H19 NPBT guidance for 0-7% and full year guidance for 1-9% growth were below expectations. While top line growth is expected to be solid and driven more from its offshore business, margins are weaker than expected due to:
- a higher cost base associated with the new EBA;
- the staff recruitment drive (revenue lag costs);
- the new credit card regulations in the UK;
- start-up costs in Germany; and
- increased investment in IT and its digital transformation.
As a result, FY19 profit growth will be underpinned by FLT's offshore businesses (particularly the Americas) which FLT expects will comprise approximately 50% of group profit. Australia's profit is expected to be down for the 1H19 and we forecast it to be flat for the full year. Uncertainty associated with Brexit is also included in its forecast.
Following FLT's weaker than expected trading update and guidance, we have reduced our FY19 underlying NPBT forecast by 4.7% to A$414.5m (+7.7% on FY18). Our new forecast is at the upper end of management's guidance range of A$390-420m. Due to a lower tax rate, the downgrades at the NPAT level are smaller. FY19 earnings growth should be underpinned by
- ongoing market growth;
- stable airfares;
- a lower AUD;
- further Business Transformation benefits;
- continued growth from its overseas business; and
- further market share gains in corporate travel.
We forecast stronger growth in FY20 as we expect FLT to more fully benefit from the new consultant additions in Australia and further Business Transformation benefits.
Flight Centre Travel should deliver double digit earnings growth over FY20-22 by achieving its Business Transformation targets.
We believe Flight Centre Travel (FLT) has been oversold. On an FY19F PE of 15.4x, FLT is now trading at a material discount to the sector. Despite offering a lower growth outlook relative to peers, FLT has an extremely strong balance sheet and an impressive track record of sustained cashflow generation. In line with the Board's commentary, we believe capital management is possible in 2019 and FLT is currently conducting a balance sheet review to consider the most appropriate use of its excess cash. As at 30 June 2018, FLT had approximately A$3.03 per share of franking credits available and A$444.5m of company cash and A$108.5m of liquid investments (totaling A$5.47 per share).
Offering a Total Shareholder Return of 14.6% plus balance sheet optionality, we upgrade our recommendation from Hold to Add. We caution new investors that patience is required and any re-rating will not occur until there is evidence the Australian business has recovered.
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