Flight Centre Travel: Breakeven in the 2H22

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

25 July 2022, 9:00 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• Flight Centre Travel's (ASX:FLT) trading update highlighted a stronger than expected 4Q22 reflecting a solid rebound in travel demand and higher ticket prices, with it upgrading FY22 EBITDA guidance by 7.7-15.6%. Importantly, Leisure was profitable in May/June and Corporate has been profitable since March.
• In regards to FY23, FLT noted the ongoing challenges of new strains of COVID, limited airline capacity and its need to rebuild staff numbers to the required levels. We also remain concerned about reduced international commissions.
• Given the risks around execution and its changing business model, we maintain a neutral view and our target price is unchanged at (login to view).

Upgrades FY22 guidance - strong 4Q with Corporate & Leisure both profitable

FLT is now guiding to an FY22 EBITDA loss of A$180-190m compared to a loss of A$195-225m previously (7.7-15.6% upgrade). This was better than MorgansF of -A$208.9m and consensus of -A$206.9m. FLT will report its FY22 result on 25 August. 

FLT’s guidance range implies a 2H22 EBITDA loss of A$5.9m to a profit of A$4.1m. This is a strong improvement on the 1H22 loss of A$184.1m. On our calculations, the mid-point or -A$0.9m equates to an underlying NPBT loss of A$88.4m (FLT’s old key metric). 

FY22 TTV is expected to be in excess of A$10bn. This was stronger than our forecast of A$9.2bn. This equates to over 42% of FY19 levels (A$23.7bn). TTV is being assisted by strong demand and materially higher ticket prices.

FLT said that on a monthly basis, a number of its businesses were tracking near or above pre-COVID levels. Asia continues to lag the recovery given China’s zero-COVID policy. 

We expect that revenue margins are materially lower than pre-COVID and FY21 given the weighting of sales to domestic travel and Corporate (channel mix issue). Also, at this point, most of its international bookings are the Visit Friends and Relatives (VFR) market (less upsell for FLT). 

While no mention was made on cashflow or its liquidity position, we expect that it has continued to improve. In March, operating cashflow was +A$2m (included A$4m of government subsidies). As at 31 March, FLT had liquidity of ~A$765m.

FY23 outlook is improving but challenges remain

In regards to FY23, FLT noted the ongoing challenges of new strains of COVID, limited airline capacity and its need to rebuild staff numbers to the required levels. 

FLT didn’t provide any update on the reduction of front end international commissions ex Australia to 1% from 5%. We expect an update at its FY22 result and expect the impact will affect revenue margins in FY23.

We upgrade FY22 EBITDA to be in line with guidance; FY23/24 is unchanged

We have upgraded our FY22 underlying EBITDA forecast to be at the mid-point (- A$185m) of FLT’s new guidance range.

We have left our FY23 EBITDA forecast unchanged at A$324.8m (consensus is A$329.1m). We recently downgraded our FY23 forecast due to limited ANZ international airline capacity (currently at 40-50% vs 2019), China’s strict travel restrictions and the need to rehire and train staff.

In ANZ, we reduced our revenue margins due to greater domestic travel (lower margin vs international), fewer higher-margin attachments and land product sales (VFR has less upsell opportunities) and for the reduced front end international commissions.

The unknown on travel demand is whether inflationary pressures and recession fears affect household and corporate budgets. 

Given its greater exposure to international travel, we now don’t expect FLT’s earnings to fully recover to FY19 levels until FY25.

Investment view

Our valuation remains unchanged at (login to view) given it focuses on recovery year earnings post COVID.

Based on our forecasts, FLT is trading on an FY24F PE of 15.8x, which is largely in line with its historical average PE pre-COVID. We consequently maintain a Hold rating.

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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.