Australia | Jul 19 2011
– Flight Centre has lifted earnings guidance
– Increase reflects confidence in earnings growth outlook
– Brokers lift estimates, targets and ratings
– Recent share price weakness has improved the value on offer
By Chris Shaw
Despite a tough macroeconomic environment in Australia, Flight Centre ((FLT)) has managed to buck the trend and last week lifted earnings guidance for FY11. At the same time, management indicated double-digit earnings growth for FY12 was likely.
Management has guided to FY11 net profit before tax of $243-$247 million, which compares to previous guidance of a result between $220-$240 million. The new guidance implies earnings growth of 22.5-24.5% relative to FY10.
As Citi points out, Flight Centre is one of the few Australian companies to enjoy benefits from a stronger Australian dollar, while earnings have also been supported by ongoing resilience in travel and leisure spending in general.
Citi also notes for the first time in 12 years Flight Centre's US operations will report positive earnings, a sign management's investment in corporate travel capabilities and changes to the leisure business are generating positive results. BA Merrill Lynch also sees scope for additional improvement in US earnings, especially from FY13.
JP Morgan expects both the leisure and corporate travel operations will continue to deliver growth, something that offers further upside to earnings estimates in coming years. Helping is the fact international airfares have remained below historic trend levels, which in combination with the strong Aussie dollar is boosting demand for outbound holidays.
To reflect the revised guidance by Flight Centre earnings estimates across the market have been lifted. Citi has lifted its profit forecasts by 6% this year and by 3-4% in both FY12 and FY13. JP Morgan has increased its numbers by 5%, 3% and 4% respectively, while Credit Suisse made only minor changes.
Consensus earnings per share (EPS) forecasts according to the FNArena database now stand at 168c this year and 183.9c in FY12. The changes to estimates have seen a change in consensus price target, which now stands at $25.24 compared to $25.47 previously. The decline reflects the significant change in target made by Macquarie.
While operations at Flight Centre have clearly been going better than expected the share price has gone the other way, weakening from $23.50 in May to below $22.00 now. This has improved the value on offer, enough for both JP Morgan and RBS Australia to upgrade to Buy ratings from Neutral previously.
Overall, the FNArena database shows Flight Centre is now rated as Buy seven times and Neutral once. Morgan Stanley is not in the database but rates Flight Centre as Overweight within an In-Line view on Australian emerging companies.
What makes Flight Centre a Buy according to Citi is a combination of value and greater earnings certainty than a large portion of domestic retail peers. On Citi's forecasts, the stock is trading on 11.5 times FY12 earnings, while the early guidance for double-digit growth in FY12 implies management is confident in the earnings outlook.
Credit Suisse also sees value, expecting Flight Centre will re-rate back to its recent premium to the Small Industrials index and an absolute earnings multiple of around 15.8 times, as this would be more appropriate given the earnings outlook. For Credit Suisse this implies a price target of $29.00, which offers significant share price upside potential.
While the proposed carbon tax may have some impact given it is likely to raise costs and ticket prices. DJ Carmichael expects this impact will be relatively minimal. On its numbers the tax is likely to represent only 2-3% of average domestic air fares, something unlikely to be enough to have a significant impact on demand.
The non-Buy recommendation comes courtesy of Macquarie, which maintains a Neutral on the stock. In the broker's view the current Flight Centre share price factor in a large portion of the potential upside for the domestic operations, particularly given the cyclical nature of the business. While there is scope for better returns from offshore, Macquarie sees these as higher risk as well, meaning the risk/reward is fairly balanced at current levels.
Over the past year Flight Centre has traded in a range of $17.21 to $25.12, the current share price implying upside of around 15.6% to the consensus price target in the FNArena database.
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