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Morningstar | Here Comes ANZ Turbulence as Flight Centre Downgrades Guidance. See Updated Analyst Note from 26 Apr 2019

Flight Centre's Australia and New Zealand, or ANZ, unit was on course to record its third consecutive period of material earnings decline in the second half of fiscal 2019. However, the severity has caught even us by surprise, resulting in the revised fiscal 2019 group underlying profit before tax guidance of AUD 335 million to AUD 360 million. This is 14% below the previous projection and implies a year-on-year PBT fall of 10% to 21% in the second half of fiscal 2019.

We have accordingly cut our fiscal 2019 group PBT estimate by 11% to AUD 355 million. We now project second-half ANZ EBIT to fall 40% to AUD 86 million, compared with our previous expectation of a 23% drop. Our forecasts beyond fiscal 2019 are largely unchanged, and we maintain our AUD 36.50 fair value estimate.

The leisure segment, accounting for over 70% of total transaction value in ANZ, continues to be the key drag. Some of the causes for this downturn may be temporary, such as investment in staff, new wage deals, and impact of disruptions from restructuring activities. However, poor consumer sentiment (exacerbated by the weak housing market) and increasing structural pressures on Flight Centre's brick-and-mortar network are also increasingly making their presence felt. This is evident in the flat ANZ TTV in fiscal 2019 to-date, a notable slowdown given first half TTV was up 2% and solid growth in corporate travel TTV.

This weak near-term backdrop for ANZ is one reason we consistently felt shares in no-moat-rated Flight Centre were overvalued. A more important reason is the longer-term structural risk facing the group, a factor that underpins our muted five-year EBIT CAGR of minus 2%, with ANZ CAGR of minus 6% not enough to offset (corporate travel-driven) overseas EBIT CAGR of 3%.

However, the severe reaction to the guidance downgrade means Flight Centre shares are now trading just 6% above our intrinsic assessment. The risk/reward proposition is becoming more balanced.