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Stock: Flight Centre

Stock code: FLT

Share Price: $23.51

Broker Sell Recommendations:

State One Stockbroking (18th April 2011, share price was $22.79 that day)

Shadforth Financial Group (18th April 2011, share price was $22.79 that day)

Alto Capital (24th January 2011, share price was $24.53 that day)

Chart

Chart: Share price over the year to 29/04/2011

Company Description

Flight Centre Limited is Australia’s largest listed travel agent with operations throughout Australia, New Zealand, South Africa, Hong Kong, Canada, the USA and the UK. FLT employs about 8,000 consultants with over 2,000 locations across the globe offering full travel services including holidays, tour products, accommodation, travel insurance and car hire.
In addition to FLT’s retail travel brand, the company’s other leisure, corporate and wholesale brands include: Escape Travel, Travel Associates, Student Flights, quickbeds.com, FCm Travel, Solutions, Stage & Screen Travel and Freight Services, Kistend and Campus Travel, CiEvents, Infinity Holidays and Overseas Working Holidays.
Link to Company Stock Quote & Charts: Flight Centre

 

Link to Recent Company News: Flight Centre

Link to Company Investor Centre: Flight Centre

Share Price Performance

Chart

Chart: Share price over the five years to 29/04/2011 versus ASX200 (XJO) and competitor Wotif.com (WTF)

Long-term shareholders have had a turbulent ride with Flight Centre. The share price went from $25 at the beginning of 2004 to just $10 at the start of 2006, only to soar again to over $30 in early 2008. It then crashed to $5 in the beginning of 2009, post-GFC, from which point it proceeded to rocket again to today’s share price of $23.51 – an almost fivefold increase in just two years. Competitor Wotif.com has been positively stable in comparison, and it’s the threat of competition from this very competitor – and a host of other online providers – that poses a great risk to Flight Centre, who have been much slower in jumping on the internet bandwagon.

Technical Picture

A quick glance of the Flight Centre daily chart is supportive for short term FLT bulls. Flight Centre is testing the upper Bollinger Band after breaking out of four week congestion area on daily chart. The next minor resistance level for FLT bulls should be prior support area made during January 2011 lows. FLT prices appear headed to prior swing high of 25.12. Bulls need to see prices “walk up” the Bollinger band to confirm the continuation of the uptrend that began in March. Threats to bullish thesis is that the RSI indicator is suggesting the current uptrend is becoming overbought and a closer look at trading activity is revealing that the volume is following prices higher.

Financials

Flight Centre posted a record first half profit, up 38 per cent on the previous year. Net profit rose to $70.5 million, revenue rose 12 per cent to $916.6 million and profit margins were relatively flat from the prior period.
While Flight Centre says it achieved solid profits in March, the company told investors that growth would need to continue into the fourth quarter so that it can reach its earnings expectations. Management also stated it would not increase guidance despite the strong start to the year. It said that FLT “will continue to target a full year profit before tax of between $220 million and $240 million, excluding any abnormal items that may arise.” If Flight Centre can maintain this pace, this would represent 10 to 20 percent growth based on the prior year results of $198.5 million for 2009/10, however it remains to be seen if these levels can in fact be achieved.

Flight Centre management also told investors that based on the current economic volatility it wouldn’t be prudent to increase guidance to higher than what was already given. Management said the latest earning report was very strong and the firm would not expect to maintain its current profit growth rate of greater than 30 per cent over the full year.
The subdued comments are based on several tumultuous events affected the broader travel sector including civil unrest in Egypt, crippling floods and cyclones in Australia and the devasting 6.3 magnitude earthquake that hit New Zealand, killing 172 people – one of the worst disasters in terms of loss of human life in New Zealand’s history. Flight Centre has seen its customers cautious in booking and value oriented, with many finding better value from other online providers.
FLT’s US division saw its losses decrease moderately over the last period as economic conditions improve in the States. Flight Centre reported an interim dividend of 36 cents fully franked.

Key financials for the past three years

2008A2009A
2010A
Sales Revenue ($m)
1,4101,678
1,769
EBITDA ($m)
244148 257
EBIT ($m)
20088 204
Adjusted NPAT($m) 14398 140
Reported NPAT ($m)
14338 140
Price/Earnings 15.711.2 11.9
Dividend Yield (%)
5.2 1.0 4.2
Net Profit Margin (%)
10.15.8 7.9
ROE (%)
23.716.0 19.7
ROA ($)
8.46.7 8.2
Net Debt/Equity (%)
n/a n/a n/a

 

Broker Recommendations

John Rawicki of State One Stockbroking currently has a sell recommendation on Flight Centre, citing increasing competition and squeezed margins as the major factors. ”The company faces increasing competition from discount online booking agents,” says Rawicki. “In addition, discount airlines are lowering the cost of travel – that means less revenue for travel agents. Its strategy of acquiring traditional bricks and mortar travel agents may generate some efficiencies, but doesn’t remove the threat from online agents. Take some profits.”
Richard Batt an analyst at Shadforth Financial Group also has a sell recommendation, and sees this as an opportune time to sell and get into alternative investments. “In the short term, earnings could be impacted by recent natural disasters and airfare price increases flowing from rising fuel costs,” he says.
Brendan Fogerty from Alto Capital also has a sell and says: “Australia’s largest travel agent has experienced good growth over the past decade. Industry conditions continue to tighten as discount airlines and growing competition from online travel agents add margin pressure through the sector.”
Outlook
Management’s decision not to increase its earning guidance despite posting impressive first half earnings should be a concern for investors. If management is correct that the difficult economic environment coupled with rising interest rates and utility costs will cause consumers’ discretionary spending to drop. In addition any currency fluctuations, new natural disasters or continued political unrest would have a negative impact on revenue.
Not only is Flight Centre vulnerable to changes in consumer spending, it also has to deal with its significant fixed costs. FLT’s high fixed costs are attributed to significant ownership in brick and mortar stores. Any drop in revenue as a result some of the risks we previously mentioned will cause earnings to fall significantly.
Internet-based competitors, who offer many similar services and have lower costs of doing business than bricks and mortar stores, offer a significant risk to Flight Centre’s business model and will continue to pressure its margins over the coming years. In the long run many travel analysts expect online travel business to slowly take a larger percentage of the market from brick and mortar companies like FLT. It is expected that Flight Centre will maintain its market leadership in more complicated and expensive travel bookings, however the threat from online competitors is real and Flight Centre’s reliance on its shopfronts means that it is still very much in the dark ages when it comes to online bookings.
Conclusion

Flight Centre shares have rebounded fairly well over the last 12 months as consumers gained confidence that the global financial crisis was over. Recent earnings for FLT have been fairly impressive as management has done a good job guiding the company out of difficult economic conditions. The important thing for FLT investors to remember is that the past is not always indicative of future success. Taking a look at the overall business and industry as a whole, investors may be concerned about what may lie ahead for FLT.

Flight Centre’s travel business is facing ever-increasing competition from internet retailers resulting in the inability to increase its margins. Not only are the days of increasing margins very much in the past, FLT has higher fixed costs than its online competitors.

Even though FLT shareholders have been rewarded in the past 12 months it may be time to consider taking any profits or re-allocating capital to better ideas.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.