Flight Centre Travel: Better than feared

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
25 February 2021, 4:45 PM
Sectors Covered:
Agriculture, Food & Beverage, Travel

  • FLT reported a large 1H21 loss due to COVID travel restrictions. Importantly, its cash burn continues to reduce and FLT has enough liquidity to weather a low revenue environment for over 30 months.
  • FY21 remains a challenging year for FLT. Given travel restrictions, it targets to return to profitability have now been pushed out slightly. With vaccine success and some international travel, it should return to modest profitability in FY22. We expect FLT to return to its FY19 earnings in FY24.
  • FLT is well placed to benefit from an eventual recovery in travel activity and vaccine success could accelerate its recovery. However, its exposure to international Leisure travel and higher cost bricks and mortar business model, will mean it will be one of/if not the last to reach pre COVID levels of profitability of its peers. We maintain a Hold rating with a new price target (login to view price target).

Challenging 1H21 but it was better than expected

FLT reported a large loss (NPBT -A$247.2m) due to COVID travel restrictions. Pleasingly, however, the result wasn’t as bad as feared. TTV was down 87.6% or was 12% of the pcp with Corporate at 17% of the pcp, while Leisure was only 7%. Corporate’s loss was A$67m, while the Leisure’s loss was A$172m.

Reflecting strong pent up demand, revenue reached a COVID record in December. In Australia, FLT’s domestic leisure sales exceeded prior year levels within two days of Queensland announcing plans to reopen its borders.

FLT continued to win new corporate business with the FCM business alone winning new accounts with annual pre-COVID spend of US$691m (skewed to US and UK/Europe). FLT reported an operating cash outflow of A$660.0m in the 1H21.

Cash burn continues to reduce and FLT has plenty of liquidity At 31 December 2020, FLT had liquidity of A$1.2bn. Importantly, its cash burn continues to reduce (December was A$30m vs A$43m in July). With improved top line and further cost savings, we believe that FLT’s cash burn is now down to approx. A$26m/month. In addition, FLT has another A$50m of one-off cash costs to pay in the 2H21. Taking into account its liquidity covenant (~A$350m) and new cash burn, FLT has >30x months of liquidity in a low revenue environment.

Breakeven/profitability targets are pushed out slightly

As expected, given the uncertain operating environment, FLT did not provide FY21 earnings guidance.

TTV for January improved marginally to 13% of pre COVID levels (Corporate was 20% and Leisure was 9%). However if domestic borders stay open, TTV should continue to improve, particularly in Corporate where it has won a lot of new business.

FLT is now expecting to breakeven/profitable in late 2021 or early 2022. Management highlighted the possible resumption of low risk international travel during the 2H of 2021 (1H22) which would pave the way for its return to profitability. FLT said that international travel out of the UK is expected to resume by mid-May 2021 (before the peak summer holiday season). It thinks international travel from North America should resume at a similar time.

Despite its much smaller shop footprint, FLT believes that in FY24 it can achieve its FY19 level of TTV at a much lower cost base. Given travel restrictions and FLT’s slightly delayed targets in returning to profitability, we have increased the losses we expect it to generate over FY21 and FY22.

We now assume a 2H21 NBPT loss of A$199.6m (vs A$247.2m in 1H). Assuming that some international travel resumes in the 2H21, we expect FLT to be modestly profitable in FY22. We expect FLT to return to its FY19 NPBT in FY24.

Investment view – Hold rating 

FLT’s transformation has execution risk (>50% less stores but materially low cost base). However, if it delivers, there is material upside. We think its Corporate business is highly valued. After applying higher multiples given the appreciation in peers, our valuation has risen. We maintain a Hold rating on FLT.

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