Flight Centre Readies For Take Off

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

By Andrew Nelson

Comments from Flight Centre’s ((FLT)) AGM underline that the company’s Australian business is improving more quickly than most had been expecting. Volumes have risen to record levels, with plenty of help coming from price discounting by the airlines and an overall improvement in consumer confidence.

Yet while things are looking fine for the future, management decided to maintain its FY10 guidance, with memories of a turbulent FY09 far from faded. Brokers, however, haven’t maintained theirs.

The Australian broker community was a little more enthusiastic in their outlook for Flight Centre than management and there seem to be quite a few reasons why. One of the major positive points coming out of the AGM reaction was recognition of the performance of the group’s Australian business, which after all, generates 73% of the company’s pre tax earnings.

With airline yields looking like they are bottoming, and signs of increased outbound travel demand emerging, plus the flow on benefits from a stronger AUD and relatively low airfares, analysts from Deutsche Bank predict the Australian division will be back at FY08 levels of profitability sooner than expected.

RBS Morgans also believes the travel industry has now stabilised and with it seeing travel demand as being highly leveraged to the economic recovery and improving consumer and business confidence In the past, points out the broker, tourism numbers have rebounded strongly after travel shocks and economic downturns.

This improvement in travel demand is also being mentioned by Credit Suisse, who notes that some of the company’s competing travel agents, like Qantas and Virgin, have already released traffic and capacity statistics confirming the signs of recovery.

However, the team from Deutsche Bank notes that while the Australian division is recovering more quickly than other markets, the loss-making Liberty business in the US is also tracking ahead of budget, with expectations for a break even result in FY10.

And when Liberty finally does become profitable, analysts from UBS think there will be significant EPS and valuation upside as a result. The broker is of the opinion that the worst is now behind Liberty, noting improving traffic numbers and a reduced cost base after restructuring.

RBS Morgans goes on to note that not only is the company’s network ready to capitalise on improving market conditions, the strong balance sheet the company is now working with also leaves it well positioned to take advantage of any opportunities that may arise.

The broker also points out that the first quarter is usually the company’s weakest quarter, with earnings normally seasonally skewed to the second half . Yet Q1 before tax net profit of $34m was well ahead of expectations, leaving the broker to think the full-year guidance of $125m-135m, which represents 25-35% growth, is actually very conservative.

Morgans notes that if you were to extrapolate out the first quarter numbers, Flight Centre will easily fly over the top of the high end of guidance. Expect the guidance to be upgraded with the interim result in February, says the broker. Credit Suisse agrees, believing that momentum over the remainder of this half will continue to provide a strong base that will probably see the company beat guidance.

Of the four brokers mentioned, three have a Buy call on the stock. Only Credit Suisse has a hold call, and while the broker has lifted its forecasts to $5m above the top end of Flight Centre’s guidance range post the AGM, it still believes that a total rate of return of 18% over the next 12  months, while certainly positive, only warrants a Neutral call given the stock is trading on an FY10 PER of 20.1x.

Deutsche is also predicting a $140m profit and this sees it lift its FY10-11 EPS by 3.6% and 13.4%, while its price target jumps to $19.80 per share (from $15). UBS has upgraded its FY10-12 EPS forecasts by 4%, 6% and 7%, leaving it 19% above guidance, while its price target goes from $16.20 to $19.00.

RBS has upgraded its FY10-11 net profit forecasts by 17.8% and 21.9% and now sits at $161.1m for its FY profit result. This lifts its target price and valuation to $20.00 (was $16.31) and the broker otherwise believes the stock is undervalued on an FY11 PER of 13x.

The FNArena Sentiment indicator is giving a reading of 0.3 on Flight Centre, with the three Buys and one Neutral mentioned above offset by a Sell from JP Morgan and a Neutral from Macquarie (revised price target of $17.75). Note that JP Morgan has yet to update its thoughts post the AGM.

In market action today shares are down 15c to $16.86 versus a 12-month trading range of $3.39 to $17.47.

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