Flight Centre Travel: A long journey back

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
27 August 2021, 9:30 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • FY21 was a tough year for FLT given COVID related travel restrictions.
  • Despite ANZ travel restrictions, pleasingly, FLT’s monthly cash burn has not materially changed given the recovery underway in the Americas and EMEA. Importantly, FLT has 20 months of liquidity to survive a low revenue environment.
  • FY22 will continue to be a challenging year for FLT given ANZ border restrictions. We have materially revised our forecasts.
  • FLT’s share price has risen strongly over the last few days on vaccine news and we maintain a Hold rating with a new price target of (login to view).

Event: FY21 result was slightly worse than expected (due to ANZ restrictions)

In FY21, due to COVID travel restrictions, FLT reported a large loss (underlying NPBT -A$507.1m; 1H was -A$247.1m and 2H was -A$260.0m).

Analysis: 2H sales recovery is offset by the end of JobKeeper

TTV was down 74% (was 17% of FY19 levels). Corporate was 24.2% of FY19, while Leisure was only 10% given its greater exposure to international travel. ▪ The recovery in 2H21 sales was largely offset by the end of JobKeeper.

In FY21, Corporate’s loss was A$122m (1H loss was A$67m), while the Leisure loss was A$366.5m (1H loss was A$172m). FLT continued to win new corporate business with the FCM business alone winning new accounts with annual pre-COVID spend of US$1.4bn (skewed to Americas and EMEA).

FLT reported an operating cash outflow of A$912.2m. As at 30 June 2021, FLT had net cash of A$669m (excluding the convertibles).

FY22 is going to remain tough due to ANZ; northern hemisphere is recovering

With a travel recovery well underway in the northern hemisphere, July TTV improved to 26% of pre COVID levels (Corporate was 41% and Leisure was 16%). However, management said that August group revenue is likely to fall slightly on July given ANZ border restrictions.

FLT reiterated that it is targeting a return to profitability during FY22 on a monthly basis in both Corporate and Leisure. This requires Corporate TTV of ~50% of preCOVID levels (excludes low margin quarantine work) and Leisure at 40%.

FLT is targeting a return to pre-COVID TTV by June 2024, with significantly reduced operating costs.

Taking into account its liquidity covenant (~A$562m) but excluding cash on trust of A$331m and reflecting a monthly cashburn of A$35m (up slightly from A$32m in June), FLT has 20 months of liquidity in a low revenue environment.

Forecast implications: We revise our FY22 forecast for ANZ restrictions

We have revised our forecasts in light of Australia’s border and travel restrictions (hurts when you don’t have JobKeeper), delayed expectations for international travel to resume and QAN’s decision to reduce international commission from 5- 1%.

We now assume a FY22 NBPT loss of A$220.5m (was a profit of A$22.0m). Assuming Australian international borders reopen, we assume that FLT is profitable on a full year basis in FY23. We expect FLT to return to its FY19 NPBT in FY24, less A$10m for reduced QAN international commissions.

Investment view: Hold recommendation

FLT’s transformation has execution risk (>50% less stores but materially low cost base). However, if it delivers, there is material upside. FLT is well placed to benefit from an eventual recovery in travel activity.

However, its exposure to international Leisure travel and higher cost bricks and mortar business model, means that it will likely be the last of its peers to reach pre COVID levels of profitability. FLT’s Corporate travel business is the jewel in the crown and is undervalued given the underperformance of the Leisure business in recent years.

Following forecast revisions, our valuation has fallen to (login to view) previously. We maintain a Hold rating on FLT. From here, key share price catalysts are Australian domestic and international borders reopen and Transatlantic travel resumes.

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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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