Flight Centre Travel Group
Date of inclusion: 8 September 2021
Share price on inclusion in Marc & Stuart’s Top Picks: $18.59
52-week range: A$11.18 – A$20.16
Risk Level: Medium
Flight Centre is a globally significant travel company
The Flight Centre Travel Group has grown from its Brisbane roots in the 1980s into one of the world’s largest travel companies, serving both retail and corporate customers. The company has retail operations in 23 countries and its corporate travel management network has a presence in more than 90 countries. When the world starts travelling again in earnest after the Coronavirus Crisis of 2020-21, we believe Flight Centre will be a leading beneficiary through its numerous market-leading brands.
The last lockdown period in Australia is likely to end soon
Travel-related stocks listed on ASX have not been able to recover from the February-March 2020 ‘Corona Crash’ because of ongoing lockdowns in various parts of Australia, the closure of interstate borders and, significantly, a ban on Australians travelling overseas. The Australian government’s position as of late July is that Australians will be able to freely travel overseas when 80% of the population is fully vaccinated. As per The Guardian’s Covid Australia vaccine rollout tracker, the nation is currently on track to reach that figure by 19 November 2021, a little over 10 weeks from now. New South Wales is likely to hit that target a few weeks earlier.
Not just any company
Flight Centre grew into one of Australia’s most admired companies in the 1990s and 2000s because of the quality of its operating systems, its corporate culture and its ability to constantly adapt to its market environment. For readers wishing to understand why Flight Centre has often traded at a valuation premium to its peers and enjoyed such strong growth, we refer them to Mandy Johnson’s highly readable 2013 history of Flight Centre, called ‘Family Village Tribe’.
Flight Centre was in continuous growth mode prior to COVID-19
In FY19, the last financial year preceding the Coronavirus Crisis, Flight Centre handled $23.7bn in TTV, that is, Total Transaction Value, up 8.7% on the previous year. In terms of actual revenues, the company generated just over $3BN in FY19. Just over half that was earned outside Australia. Basically, every year since its 1995 listing Flight Centre has grown the scale of its business. Given the quality of the management team under founder and CEO Graham Turner, we see no reason why Flight Centre can’t return to this ‘normal’’ growth path once COVID-related constraints are out of the way in its key markets. Flight Centre stock was north of $42 per share at the time of the FY19 result.
Should do very well in corporate travel
We expect that Flight Centre’s moves into corporate travel in recent years will now pay big dividends. Business people unable to travel for the last 18 months will now be making up for lost time. In FY19 corporate travel was about 38% of total TTV.
The stock is markedly undervalued given the strong growth that is coming
For obvious reasons Flight Centre’s FY21 results were horrible, with revenue of only $396m and an underlying loss before tax of $507m. However, there is plenty of liquidity on the balance sheet to reboot its growth engine.
On consensus numbers Flight Centre ekes out a modest EBITDA profit of $16m in FY22, but then gets to $380m in FY23 and $503m in FY24. For that type of rebound, an EV/EBITDA multiple of only 9.3x for FY23 and 7x for FY24 on consensus estimates is tiny, in our view.
- Delays in the roll out of vaccines in Australia and New Zealand may push out the lifting of lockdowns.
- Ongoing bans on international travel in 2022 will reduce the company’s growth potential.
- New outbreaks of COVID-19 in relevant overseas markets could hamper FLT’s growth.
- Slowing economic growth will likely reduce the company’s growth rate.
Update 4 October 2021
Reason for update: Australia sets date for international border re-opening
On 1 October 2021, Prime Minister Scott Morison announced that as soon as the national average vaccination rate hits 80%, Australia will open up again for international travel. While individual states will still have to have an 80% vaccination rate themselves, this is still fantastic news for the travel industry. Qantas is currently expecting to resume international flights on 14 November 2021.
There are still a few catches, however, as all passengers will be required to be fully vaccinated as well as return a negative PCR COVID-19 test within 72 hours of departure. Additionally, hotel quarantine will be replaced with seven days of home quarantine for vaccinated Australians and permanent residents.
Overall, this is fantastic news for the Flight Centre Travel Group and we expect to see strong results for the month of November and December 2021. The stock might have hit its 52-week high on 1 October, but we think this is just the beginning of a long and high flight.
Update 8 February 2022
Reason for update: Australia is opening up to tourists again!
Opening up to travellers per 21 February
On Monday, the Federal government announced that Australia will be opening up to double-vaxxed international travellers again on 21 February. This is great news for travel stocks, including our Top Pick Flight Centre Travel Group (ASX:FLT). The stock shot up almost 8% yesterday on the back of this news.
Although FLT is a very international organisation, a very substantial portion of its revenues is generated in Australia. Before COVID, approximately 50% of revenues was generated domestically. So, the country opening up again is a very big deal for the stock.
Risks remain, but we don’t expect Australia to fully close its borders again
We put FLT on our Top Picks lists back in September 2021 specifically in anticipation of the country opening up again before Omicron spoiled the party in December. This highlights the ongoing risks for travel stocks, in our view, i.e. the emergence of new variants that can potentially lead to lock downs and shut downs again.
Having said that, we don’t expect Australia to close its borders again under the current government. Things might be different if and when Labor wins the upcoming Federal elections, though. So, it’s something to keep in mind.
In the meantime, we see upside to FLT’s share price as an influx of international travellers should be expected from March/April onwards. And the summer in the northern hemisphere could see a strong surge in travellers coming into Australia, in our view.
So, we’ll ride this wave of new hope for travel stocks.