EUR 850.00 For Business Accounts Only

Morningstar | Flight Centre Flying High on Overseas Growth

We raise our fair value estimate for no-moat-rated Flight Centre Travel Group by 3% to AUD 38 following better-than-expected fiscal 2018 results. Underlying profit before tax, or PBT, of AUD 385 million represents a 17% growth year on year and 2% higher than our forecast, landing at the top end of the guidance range of AUD 360 million-385 million. The final fully franked DPS of AUD 1.07 took total dividends for the year to AUD 1.67, an increase of 20% and based on a 60% payout.

The strong profit growth was underpinned by a 9% increase of total transaction value to a record AUD 21.8 billion, particularly boosted by the Americas and EMEA segments. Furthermore, underlying PBT margin lifted to 1.76% from 1.64% as impressive top-line performance more than offset a 12% rise in costs, especially related to expansion into the tour space. Following the higher-than-expected PBT growth in fiscal 2018, we see the current cost-efficiency program continuing to deliver benefits for the group and thus upgraded our PBT forecasts by 4% across the next few years, reflecting the recovery of net margin in the near term.

Although we increased our near-term earnings assumption, we believe the positive sentiments are more than reflected in the current stock price. The current consensus-based forward price/earnings multiple of 21.9 times sits materially above the five-year average of 15.7 times, as does the current enterprise value/EBITDA of 12.5 times versus the five-year average of 7.4 times. We expect structural pressures on Flight Centre's physical store-based model are only likely to intensify as consumers become more comfortable with dealing directly with suppliers and online agencies and technology continues to erode the information imbalance between Flight Centre and the leisure traveller. Shares in Flight Centre are trading at a 60% premium to our intrinsic assessment.

We forecast a recovery in net margin in fiscal 2018 and 2019 as benefits of cost-reduction initiatives, efficiency improvements, and system enhancements come through. However, it is on the ability of these gains to offset the structural headwinds and maintain net margin growth that we maintain our conservative stance.

These are the reasons our three-year PBT compound annual growth rate forecast is flat, considerably lower than the current consensus projection of 12% over the same time frame. More importantly, our longer-term net margin forecast remains at 1.6%, below management's aspirational target of 2.0%--one that appears to have largely been baked in by the market, judging by the impressive stock price performance in recent months. That, in our view, leaves very little margin for error, particularly as Flight Centre's net margin has declined from 2.4% in fiscal 2013 to 1.8% in fiscal 2018.

The company generated almost half of its total transaction value from overseas in fiscal 2018, with EMEA and the Americas business combined contributing AUD 7.9 billion. The offshore segments have been contributing an increasing portion for the group over the past few years, and we expect the trend to continue. The Australia/New Zealand segment lagged the other segments with a 4% drop in underlying PBT. In fiscal 2018, the company trimmed the sales staff by approximately 5% across the segments except for Asia. Flight Centre's capital position remains strong with a net cash position of AUD 517 million.