Morningstar | Flight Centre Coming Down to a More Reasonable Altitude
Shares in Flight Centre have retraced considerably in recent months, down 35% (dividend-adjusted) since the results release on Aug. 23, 2018 and underperforming the market by 23%. The risk-reward proposition for investors is becoming more balanced at current prices, but the stock is still trading at 12% above our unchanged AUD 38.00 fair value estimate.The risk side of the equation relates to longer-term pressures on no-moat-rated Flight Centre's physical store-based model in Australia and New Zealand (almost 70% of the no-moat-rated group's earnings). As detailed in our report, "Flight Centre Still Flying Too High," published Dec. 4, 2018, we expect consumers to become more comfortable dealing directly with suppliers and online agencies at the expense of Flight Centre, and technology will continue to erode the information imbalance between the group and the leisure traveller. While management's expansion into corporate travel is a sensible diversification strategy, consensus expectations in the space for Flight Centre are too bullish, and complacent with respect to competitive dynamics and the bargaining power of large corporate customers. Furthermore, there exist cyclical threats, especially the ramifications of Australia's slowing housing market and the adverse wealth effect this may have on consumer propensity to travel.
The potential reward side of the equation is that management is cognizant of the structural headwinds ahead, and is engaged in a transformation program to drive total transaction value, or TTV, growth across all channels (including digital) while taking costs out. We have not yet baked in management's long-term goal of sustaining TTV growth at 7.0% (versus our 4.8% forecast) and lifting sustainable net margin to 2.0% (versus our 1.62% forecast). However, if these goals are achieved, our fair value estimate would rise 27% from the current AUD 38.00 per share, to AUD 48.10, 13% above the current stock price.
Flight Centre Travel Group is engaged in the travel retailing in both the leisure and corporate travel sectors, plus wholesaling.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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