Flight Centre Travel: Finally EBITDA positive
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 06 May 2022, 7:30 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- Flight Centre Travel's (ASX:FLT) trading update highlighted that TTV continues to improve rapidly as travel restrictions are removed from its key markets.
- Corporate is now profitable and Leisure is on track to return to profitability likely in May. Pleasingly, FLT is also now generating modest positive operating cashflow, which was better than expected.
- FLT’s FY22 EBITDA guidance was in line with our forecast but was slightly worse than consensus estimates.
- Our price target has risen to (login to view), reflecting the benefit of ~A$1.2bn of tax losses. Trading above pre-COVID levels on a fully diluted basis, we think FLT is fairly valued and note that earnings are not expected to recover fully until FY24.
Strong 3Q22 trading update; Corporate is profitable and Leisure isn’t far away
Group TTV for March was at 59% of pre-COVID levels (was 35% in December). Specifically, Corporate was at 76% (58% in December) and Leisure lagged at 47% (22% in December and peaked at 30% in November) reflecting FLT’s exposure to international travel. FLT is winning market share in both Corporate and Leisure.
In March, FLT generated positive underlying EBITDA of A$8m, led by Corporate given Leisure approached breakeven. Leisure should be profitable in May given May/June is its key booking period (April was impacted by fewer trading days given the public holidays).
Demand is exceeding FLT’s ability to service it given low staff levels. FLT is looking to hire ~500 additional agents. This won’t be an easy task in a tight labour market.
Given many agents have permanently left the industry, FLT’s recruits are generally new to the industry and it will take some time for them to be productive. FLT will also need to increase its shop numbers, which were cut too far during the pandemic to save costs.
Now generating positive operating cashflow; Plenty of liquidity
FLT is now generating positive operating cashflow (was +A$2m in March, including A$4m of government subsidies). This was stronger than expected. Cash burn in December was A$39m (Omicron impacted); however, when trading was strong in November, FLT burned A$20m for the month.
As at 31 March 2022, FLT had liquidity of approximately A$765m (was A$1,059m as at 31 December 2021). The reduction in liquidity reflected FLT recently repaying GBP115m of debt to the Bank of England.
FLT’s liquidity position allows for a complete unwind of working capital and includes client cash of A$539m. FLT’s liquidity covenant is ~A$350m, representing its remaining bank debt. In our view, FLT has plenty of liquidity as long as travel continues to recover and it generates positive cashflow.
FY22 guidance is in line with us but missed consensus expectations
FY22 underlying EBITDA guidance is for a loss of A$195-225m. At the mid-point, the 2H (A$25.9m loss) is a big improvement compared to the 1H loss of A$184.1m.
FLT reiterated that it expects its Corporate business to return to pre-COVID levels of TTV on a monthly basis during FY23, assuming client activity of only ~70%, with the remainder reflecting a significant contribution from its new client wins. Leisure is expected to recover fully during FY24.
Our earnings forecasts are unchanged
Given our FY22 EBITDA loss of A$208.9m is in line with guidance, we have left our forecasts unchanged. In FY24 we assume that FLT’s earnings recover to pre-COVID levels.
With ~A$1.2bn of tax losses, FLT won't pay tax until FY28 on our calculations. Our cashflow forecasts are now aligned with this assumption. Consequently, our blended valuation has risen to (login to view).
Key risks include: new and more virulent COVID variants further delaying the travel recovery; Russia’s war on Ukraine goes on for a prolonged period and other countries get involved and it materially impacts travel demand; FLT can’t hire enough staff or needs to pay them materially more; and reduced commissions hurt its margins if they can’t be recovered in other areas.
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