Flight Centre Travel: Late cycle recovery trade

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
04 May 2021, 3:30 PM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Flight Centre Travel's (ASX:FLT) trading update highlighted that TTV continues to improve slowly, with Corporate tracking well ahead of Leisure (greater exposure to international travel).
  • While difficult to forecast a travel company’s earnings in the early stage of the recovery, the surprise was that while 2H21 TTV is well up on the 1H21, FLT expects a similar size loss in the 2H as the 1H. Cash burn has increased slightly given JobKeeper has concluded. Importantly, FLT has plenty of liquidity.
  • We have revised our forecasts. We expect earnings to fully recover in FY24.
  • We retain a Hold rating for now but note that FLT’s valuation is starting to screen more attractively on normalised earnings. We would be buyers on any further material share price weakness.

3Q21 update – activity gradually recovering

FLT noted that 3Q21 TTV was >A$1bn (vs. ~A$1.5bn TTV in 1H21), with record COVID-19 revenue delivered in March following subdued activity in January and February due to border restrictions.

At quarter end, Corporate TTV was 29% of pre-COVID-19 levels, with Australia leading the recovery (albeit revenue margins are low), while Leisure is at only 14% due to its high international travel exposure. FLT said that it has won a significant number of new Corporate clients so far in FY21.

Cash burn and liquidity

As at 31 March-21, FLT had total liquidity of ~A$1.1bn (vs. A$1.2bn at 1H21), which was bolstered by its GBP50m loan from the Bank of England. FLT’s monthly cash burn averaged A$30-40m/month during the 3Q21, rising from A$30m/month in Dec-20 and reflecting the combined impact of persisting travel restrictions and reduced JobKeeper subsidies.

Fixed costs remain at A$70m/month, however variable costs are increasing slightly as activity and staff incentives return. We continue to believe FLT has sufficient liquidity to navigate these challenging industry conditions.

FY21 guidance is softer than expected

April activity was expected to continue to improve on March, with the group’s US Liberty Leisure business returning to profitability and the US Corporate business recovering strongly.

FLT expects that the 2H21 underlying NPBT loss will be broadly in line with the 1H21 NPBT loss of A$247.2m, implying a loss of ~A$494m which was below consensus expectations (A$355.3m). The anticipated recovery in 2H21 sales is expected to be largely offset by the end of JobKeeper, while the improvement in the UK, Canada, India and South East Asia has been more modest.

FY22 return to profitability (on a monthly basis) reiterated

FLT reiterated that it continues to target a return to profitability during FY22 on a monthly basis in both its Corporate and Leisure businesses, assuming a stable fixed cost base and a gradual recovery in revenue.

Management expects Corporate to return to profit ahead of Leisure (targeting Corporate TTV of ~50% of pre-COVID-19 by CY21) and highlighted the importance of future travel bubbles starting to open.

Forecast changes

Following FLT’s weaker than expected 2H21 guidance, we have increased our FY21F underlying NPBT loss to A$489.0m (in line with implied guidance) from A$446.8m previously. Due to more conservative assumptions on the rate of the recovery, we have also moderated our FY22/23F underlying NPBT by 69%/24%.

We continue to assume FLT returns to its FY19 NPBT in FY24. Due to these unprecedented operating conditions, we stress that earnings uncertainty remains high in the short term. Post forecast changes our blended valuation has fallen (login to view).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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