Flight Centre’s All Cashed Up

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

By Chris Shaw

Travel group Flight Centre ((FLT)) delivered a result at the upper end of its guidance range, net profit for the year coming in 47% higher than in FY09 at $140 million. Along with the solid result came solid guidance, management indicating earnings in FY11 should be 10-20% higher than was achieved in FY10.

This should be achievable according to BA Merrill Lynch as momentum for Flight Centre is currently positive. The second half of FY10 saw better than expected performance with respect to revenues in particular, while margins were also solid at 14% and these are seen as sustainable.

A more stable outlook as indicated by management is a clear positive with respect to achieving FY11 earnings guidance, though JP Morgan adds a note of caution in pointing out the Australian consumer environment is not particularly favourable at present.

JP Morgan also points out FY10 saw a catching up on a lot of travel that had been deferred from the previous year. With ticket prices rising there is likely to be some impact on demand, which supports a more cautious view according to the broker.

Macquarie agrees Flight Centre benefited from a rebound in travel markets generally, while growth in wholesale products and lower prices on fixed margin contracts were a positive for the margin result. Earnings were also boosted by a significant reduction in losses in the US business.

This may prove to be significant going forward, Macquarie taking the view the US operations should be profitable in FY11. As such these operations have the potential to become a material driver of earnings for Flight Centre in future years.

In FY10 Flight Centre also significantly improved its cash flow performance, moving from an outflow of $12.5 million last year to positive cash flow of $243 million in FY10. Macquarie notes this has strengthened the balance sheet as net cash has risen to $144.3 million as at the end of FY10 from $33.4 million at the end of FY09.

On the back of the result and given the positive earnings guidance offered by management, earnings forecasts for Flight Centre have been lifted across the market. As an example, JP Morgan's numbers have been increased by 8% in FY11 and by 10% in FY12, the broker now forecasting earnings per share (EPS) of 161.1c and 176.3c respectively.

BA Merrill Lynch has lifted its EPS estimates by 10% in both years to 164c and 184c respectively, while Macquarie has increased its numbers by 5% and 3% to EPS of 157.9c in FY11 and 174.9c in FY12. Consensus EPS forecasts according to the FNArena database now stand at 158.1c and 173.5c respectively.

There is also dividend upside in coming years as JP Morgan notes the FY10 dividend of 70c represents a payout ratio of 50% of earnings. Flight Centre's policy is to pay out 50-60% of earnings in the form of dividends, so JP Morgan is forecasting dividends to increase to 81c in FY11 and 93c in FY12. This implies a net yield in FY12 of 4.9%.

UBS is also positive on the potential for capital management initiatives to be introduced, particularly given Flight Centre's net cash position, the return to strong cash flow generation and a franking balance of $134 million. If no initiatives are introduced, the broker expects an increase in the dividend payout ratio.

The Flight Centre profit result has not spurred any changes in ratings, the FNArena database showing the stock is rated as Buy five times and Hold three times. Macquarie and JP Morgan both retain their Hold ratings, arguing there is enough risk with respect to the earnings outlook that the share price represents full value around current levels.

RBS Australia doesn't agree, taking the view the 10-20% earnings growth expected this year and the potential for further solid growth in later years makes the shares good buying at current levels. BA Merrill Lynch agrees, noting Flight Centre is currently trading on a FY11 multiple of 11.6 times its forecasts.

This is 15% below the stock's mid-cycle earnings multiple and is 4% below the average multiple for the consumer discretionary sector. This is enough value for BA Merrill Lynch to retain its Buy rating.

Respective price targets have increased on the back of the upgrades to earnings forecasts, the database showing an average target now of $22.72 compared to $21.77 prior to the result. Shares in Flight Centre today are slightly weaker and as at 1.20pm the stock was down 14c at $18.86.

This compares to a trading range over the past 12 months of $12.68 to $21.43 and implies upside of around 21% to the average price target according to the FNArena database.

Click to view our Glossary of Financial Terms