Flight Centre Travel: Weak 1Q but recovery is on the way

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
23 October 2021, 10:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Flight Centre Travel's (ASX:FLT) 1Q22 was weak given border restrictions and cashburn increased.
  • With key borders reopening around the world sooner than expected, FLT’s outlook is positive. Despite this, its outlook comments remained unchanged.
  • Another A$400m convertible note has been announced to pay down debt and position FLT for the recovery. This is its third capital raising since COVID began.
  • After strong share price appreciation, FLT is now trading broadly in line with pre-COVID levels on a fully diluted basis. We maintain a Hold rating.  

Event: AGM trading update and A$400m convertible note offering

1Q22 volumes have only improved slightly on 4Q21 and cashburn has risen since June, with the overseas recovery offset by weakness in ANZ.

FLT has announced another A$400m convertible note offering to repay debt and fund its growth. The coupon is 1.625% pa and the conversion price is A$27.30.

Analysis: No major improvement in the 1Q and monthly cashburn increased

During 1Q22, FLT generated ~A$1.6b in gross TTV (~A$1b Corporate vs ~A$600m in Leisure and other). This was more than double the pcp but up only 8.1% on the 4Q21 given the lockdowns in ANZ. 

In September, TTV improved marginally to 27% of pre COVID levels (was 26% in July). Corporate was unchanged at 41% (was 41% in July) and Leisure fell slightly to 14% (was 16% in July).

As at 30 September 2021, FLT had total liquidity of A$791m (was A$941m as at 30 June 2021). Cashburn in 1Q22 averaged A$50m per month but was A$41m in September (cashburn in June was A$32m). 

The NPBT loss for the quarter (MorgansF is ~A$160m) was higher than the cash outflow given Australian border restrictions increased the number of customer refunds processed and post D&A costs. Importantly, given key borders are reopening, the loss should decrease from here as activity recovers and revenue picks up.

In October, FLT has seen an acceleration of enquiry and bookings.

Outlook comments were upbeat given borders are reopening

FLT reiterated that it is targeting a return to profitability during FY22 on a monthly basis in both its Corporate and Leisure businesses. This requires Corporate TTV of ~50% of pre-COVID levels and Leisure at 40%. FLT continues to target a return to pre-COVID TTV by June 2024, but with significantly reduced operating costs. 

Management stressed that as volumes continue to improve, FLT’s profit trajectory won’t be linear, given costs will increase to service anticipated customer demand before it can realise the revenue benefit.

Taking into account its liquidity covenant (~A$353m) but excluding cash on trust of A$335m and based on an operating cash burn of A$41m per month, the new convertible note will provide FLT with at least a further 10 months of liquidity, extending its runway to >23 months in a low revenue environment.

However, we believe that its cashburn should improve materially from here.

Forecast changes

We have included the new A$400m of convertible notes in our forecasts. Given the weaker than expected 1Q22 and including the interest on the convertible note, we have increased our FY22 NPBT loss by 6.6%. In FY22, we forecast a large loss in the 1H22 followed by a modest profit in the 2H22.

With borders reopening around the world, we have upgraded our FY23 forecasts by 27.6%.

Minor upgrades have been made to FY24 to reflect FLT’s share of the Pedal Group’s NPBT (Morgans FY24 is A$19.6m) now that it is generating material profits vs pre-COVID.

Investment view – Hold recommendation

While we expect that there will be strong pent up demand for international travel and FLT will win share as consumers will want to use an agent given the complexity in a COVID world, we are concerned about FLT having enough staff to service the demand given many agents have permanently left the industry.

FLT’s share price of A$20.39 is equivalent to A$43.51 post diluting for the capital raising and two convertible note offerings.

This is broadly in line with pre-COVID levels. Based on our full recovery year forecast (FY24), FLT is trading on a PE of 16.4x which is in line with its pre-COVID average. Consequently we believe that FLT is fairly priced.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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