Flight Centre Travel: Recovering but it will take time and uncertainty remains

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

26 August 2022, 9:30 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• Flight Centre Travel's (ASX:FLT) FY22 EBITDA loss came in at the lower end of its guidance range. 2H operating cashflow was the highlight of the result.
• 1Q23 activity has continued to improve despite it being a seasonally slower trading period. While we expect a strong recovery in FY23, reduced front-end airline commissions continue to cloud FLT’s outlook. We have downgraded our FY23 and FY24 forecasts, while FY25 is largely unchanged.
• Given the risks around execution and FLT’s changing business model and the fact that earnings aren’t expected to recover fully until FY25, we maintain a Hold rating with a new price target of (login to view).

FY22 result was in line with guidance

Due to COVID travel restrictions, FLT reported an EBITDA loss of A$183.1m (2H was A$1.0m and 4Q was +A$35m). The underlying NPBT loss was A$360.9m.

Corporate lead the recovery; revenue margins are low; CF was the highlight

TTV was up 161% to A$10.3bn (was ~43.5% of FY19 levels). Corporate was 62% of FY19, while Leisure was only 30%. In June, Corporate had recovered to 101% of pre-COVID levels (however revenue was only 80%) and Leisure was 68%.

FLT’s revenue margin was low at 9.7% down from 10.0% in the pcp (FY19 was 12.9%) reflecting volumes lagging given higher ticket prices, the greater skew to domestic travel, fewer higher-margin attachments (VFR results in less upsell) and a skew to lower margin Corporate (multinationals vs SME) and online bookings. 

In the 2H, Corporate was both EBITDA and NPBT positive at A$43.3m and A$24.3m. While the 2H saw a big improvement, Leisure was still loss making. Importantly, 4Q Corporate EBITDA was A$38.6m and Leisure was A$10m.

FLT reported an operating cash outflow of A$101.4m. However importantly, it reported 2H positive cashflow of A$123.5m (material beat vs consensus). As at 30 June 2022, FLT had net cash of A$551m (excluding the convertibles).

Outlook is improving but reduced commissions causes uncertainty

FLT is targeting further bottom-line improvement during FY23 and heavily skewed to the 2H. It said that it is too early to provide specific market guidance given normal travel patterns (local v long haul, holidaymakers v VFR) are yet to resume; China is yet to reopen; airline capacity is restricted; and its revenue margins are yet to stabilise and normalise.

FLT expects to track close to its monthly pre-COVID TTV levels by the end of FY23. Given its new client wins, Corporate is now targeting a ~120% monthly TTV recovery by June 2023 with pre-COVID customers spend at only 70%.

FLT’s revenue margin is expected to remain below pre-COVID levels in the near term because of cyclical factors (higher airfare prices), planned business mix changes (growth in lower margin channels/businesses) and the lower commissions.

While capacity is restricted and the airlines load factors are high, we think FLT has reduced bargaining power with the airlines. However over the medium term, as capacity normalises and there is increased competition, we think the airlines will rely more on FLT as one of the world’s largest travel groups and will thus reward the company for its efforts.

Unlike its competitors, the Flight Centre brand is not implementing service fees however the Travel Associates brand has. 

While costs will increase, FLT expects to be able to service FY19 levels of TTV with a significantly lower cost base after making structural changes. FLT has a goal of translating 40-50% of incremental revenue growth to EBITDA.

We revise FY23 and FY24, while FY25 (recovery year) is largely unchanged

Despite recent revisions to our forecasts, today we have further reduced our FY23 and FY24 NPBT forecasts by 24.3% and 12.5% given the materially larger than expected loss from the Other business unit due to the convertible note amortisation and the material reduction in the Pedal Group earnings.

Our FY25 forecasts remain largely unchanged except for a slightly higher tax rate.

Investment view – Hold rating

Following forecast changes, our valuation has fallen to (login to view).

Based on our forecasts, FLT is trading on an FY24/25 PE of 17.4x/13.3x, which is fair given the current uncertainty. We consequently maintain a Hold rating.

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