Headwinds Increasing For Flight Centre

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            [0] => ((QAN))
            [1] => ((VBA))
            [2] => ((FLT))
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            [0] => QAN
            [1] => VBA
            [2] => FLT
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This story features QANTAS AIRWAYS LIMITED, and other companies.
For more info SHARE ANALYSIS: QAN
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Cuts to capacity by the likes of Qantas ((QAN)) and Virgin Blue ((VBA)) have not flowed through to a negative earnings impact on Flight Centre ((FLT)), the travel group lifting earnings guidance for the seventh time in the past couple of years.

The company now expects to deliver a result of more than $210 million in FY08 against previous guidance of around $200 million, the new guidance coming in close to Macquarie’s forecast of $214 million for the year. The issue is FY09, as while management has suggested an increase of 10-15% will be achieved, this will still be lower than the 17% increase Macquarie had expected.

Credit Suisse also sees the FY09 guidance as a little disappointing as market consensus had been for a result of $246 million next year, whereas management’s new guidance implies a result of $231-$242 million. As such, and with the macroeconomic outlook increasingly challenging, the broker expects achieving such a result will be a tough ask, particularly given potential for commission targets to be reset after two years of strong gains.

ABN Amro expects next year to reflect a slowdown in travel demand but a likely turnaround in the Liberty Travel operations in the US should still see the company deliver double-digit earnings growth. Such an outcome would represent organic growth of around 4% on UBS’s numbers.

While Credit Suisse has not adjusted its FY09 forecast Macquarie has, lowering its expectations to an increase of 12%, while ABN Amro has cut its FY09 forecast by 7% and UBS by 3%. This leaves consensus EPS (earnings per share) forecasts according to the FNArena database of 151.1c this year and 169.4c in FY09, with estimates ranging from ABN Amro at 148.3c this year and 161.5c next year to Credit Suisse at 154.2c this year and UBS at 174c in FY09.

The changes to earnings estimates have impacted on price targets, as the FNArena database shows an average price target now of $22.31 compared to $30.00 prior to the update as all four brokers to update on the stock today adjust their targets to reflect the new earnings guidance. Even using a lower price target UBS estimates the stock is trading at a discount of around 30% to the broader market given it is now on a multiple of around 10x FY09 earnings, making it good value in its view.

ABN Amro agrees and has joined UBS in upgrading its rating to Buy from Hold, while Credit Suisse has gone the other way and downgraded to a Neutral rating given the macro headwinds expected. Overall the database shows the stock is rated as Buy three times and Hold twice.

Shares in Flight Centre today are weaker as the new forecasts and price targets flow through into the market and as at 1.25pm the stock was off 5.5% or 97c to $16.53, which compares to a trading range over the past 12 months of $15.20 to $32.48.

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