Flight Centre Flags Cautious Outlook

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED. For more info SHARE ANALYSIS: FLT

-Questions re sustainability of model
-Acquisitions growing strongly
-Investment supportive longer term
 

By Eva Brocklehurst

Earnings growth guidance for Flight Centre ((FLT)) is unchanged for FY16 but the company's subdued commentary niggles at brokers. Flight Centre expects growth of 4-8% in FY16 but has warned that meeting guidance is not a foregone conclusion, despite the imminent and crucial May-June bookings period.

Increased uncertainty is based on a number of factors including the looming federal election on July 2, the reductions in domestic capacity announced by the airlines, and a slowing Australian outbound market.

All these factors mean UBS maintains its estimates at the top of management's guidance range while acknowledging there are risks to its forecast. The broker is comfortable with the company’s ability to deliver generally, given all its markets are profitable ex Singapore. Current market weakness, to some extent, is seen factored into expectations.

Still, for over ten years the broker believes the market has questioned the sustainability of the company's travel business, while Flight Centre has done an excellent job in the face of a number of structural trends over that period. This includes airlines and hotels dealing directly with consumers, growth in online-only travel sites and growing consumer competence when it comes to booking travel online.

UBS suspects the share price is factoring in a long-term structural decline in earnings but also maintains that these risks have been overplayed and the company is well positioned to grow earnings in the medium term. Hence, the broker's Buy rating is retained.

Morgans contends the situation is far from ideal, preferring to stick with a Hold rating. The broker errs on the side of caution and downgrades forecasts for FY16 by 1.8%, to sit below guidance. Low ticket prices, whilst stimulating demand, are affecting overall total transaction values (TTV).

This can make it hard to achieve targets. While investment in the business such as brand expansion, systems and network upgrades are supportive for the medium to longer term, the broker suspects this is currently a drag on underlying profitability.

Challenges in the operating environment are expected to offset the gains from what has been a highly acquisitive period. Morgans suspects the subdued trading and further investment in the business are likely to affect FY17 earnings.

Further out, the broker expects the company's strategy as it transforms to a world class travel retailer and benefits from cheap airfares, more airline choices and less flying time, means it can capture more of the available margin.

The broker suspects that while the underlying corporate travel market in Australia is flat, the company can make acquisitions to complement organic growth in the sector. Recent online acquisitions such as StudentUniverse and BYOjet.com are growing strongly and expected to deliver in excess of $500m in TTV in FY17.

There is also the potential to expand these businesses globally. In early FY17 Flight Centre intends to launch Aunt Betty as a virtual travel agent. Morgans expects solid earnings growth to continue in the UK, US and South Africa. The losses from the Canadian business should continue to reduce.

The update implies the last few months have not witnessed a significant recovery and momentum is not assured in May and June, Deutsche Bank suggests. The broker notes 47% of TTV in the first half was generated outside of Australia and some segments, such as the UK, had faster TTV growth in the first half.

Still, the comment that reaching guidance was not a formality suggests to Deutsche Bank that Flight Centre will approach investment decisions with its growth guidance in mind. The broker also observes growth, according to Australian Bureau of Statistics estimates, was largely driven by leisure in March, affected by the placement of Easter, while work travel deteriorated substantially.

This data is always hard to interpret, given the shifting around of Easter, and the varied timing of school holidays also adds to the confusion this year. However, given the strength of leisure and SE Asia in particular, the broker suspects there is little change in the underlying growth rate of 3-4% and awaits April data to provide more clarity.

Deutsche Bank retains its Buy rating with forecasts at the bottom end of the company's guidance range. FNArena's database shows two Buy ratings, four Hold and one Sell for Flight Centre. The consensus target is $41.47, signalling 8.6% upside to the last share price. Targets range from $36.07 to $48.00.
 

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