Australia | Aug 25 2011
– Flight Centre delivers record FY11 earnings
– Guidance is for further growth in FY12
– Forecasts little changed, targets trimmed on lower market multiples
– Buy ratings continue to dominate
By Chris Shaw
While the consumer discretionary sector is doing it tough at present not all companies are finding the going so difficult, as travel group Flight Centre ((FLT)) has been able to shrug off adverse conditions to record underlying profit growth of 18.6%.
Flight Centre recorded full year earnings of $170.7 million, the result driven by both attractive ticket prices and a rising Australian dollar. The record result has been followed by management guiding to another year of double-digit earnings growth in FY12.
As RBS Australia notes, this guidance comes despite difficult trading conditions in both the US and UK markets and a weak domestic tourism market in Australia. What should help in achieving guidance is the expectation of a further recovery in the corporate travel market.
An advantage of growth in corporate travel according to Citi is a lower cost structure, which supports the view the decline in income margin recorded across FY11 is not a major concern.
BA Merrill Lynch agrees given expectations of an increase in sales efficiency through an improvement in operating systems. Further cost efficiency measures are also expected, something BA-ML anticipates will likely see margins return to more normal levels of 13-14% over the coming years.
For shareholders there is also potential for capital management, Goldman Sachs seeing a special dividend as a possibility given an ungeared balance sheet and cash in excess of regulatory requirements of $50-$100 million at present.
On the back of the profit result Flight Centre has enjoyed some increases to the earnings estimates of brokers, with Goldman Sachs lifting its earnings per share (EPS) forecasts by 2-3% in coming years and Macquarie lifting its FY12 forecast by 4%.
Consensus EPS estimates according to the FNArena database now stand at 187c for FY12 and 201.3c for FY13. This compares to the 169.6c achieved in FY11.
Price targets have generally come down however, Citi seeing this as a reflection of a compression in peer multiples following recent market weakness. The consensus price target according to the database now stands at $23.79, compared to $25.38 prior to the result. Targets range from Macquarie at $19.00 to Deutsche Bank at $25.50.
For most in the market the expectation of further solid earnings growth for Flight Centre is enough to justify a positive view, the database showing Seven Buy ratings and only one Neutral recommendation, this courtesy of Macquarie.
Outside of the database both Goldman Sachs and Morgan Stanley rate Flight Centre as a Buy, the latter within an In-Line view on the Australian Emerging Companies sector. Buy ratings are also valuation calls, Morgan Stanley suggesting an estimated earnings multiple of 10.1 times for FY12 is attractive given Flight Centre is a market leader enjoying structural tailwinds at present.
RBS agrees there is value at current levels, while also pointing out a fully franked dividend yield of around 5% in FY12 is attractive. Macquarie is simply more cautious, seeing a softening demand environment and the fact Flight Centre will be cycling record numbers in FY12 as enough to make continued outperformance more difficult.
Shares in Flight Centre have traded within a range over the past year of $17.44 to $25.12. The current share price implies upside of around 23% to the consensus price target in FNArena's database.
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