Flight Centre Travel: Expanding in high margin Luxury travel

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

01 February 2023, 8:00 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• While the acquisition of Scott Dunn ticks the boxes strategically, FLT has paid a full price and it is only mildly EPS accretive based on recovery year earnings.
• Importantly, Flight Centre Travel’s (ASX:FLT) 1H23 result has beaten guidance, lead by a strong Corporate result. The midpoint of its FY23 guidance (pre-acquisition) was in line with consensus but below MorgansF. We have revised our forecasts accordingly.
• FLT continues to target a 2% NPBT margin in FY25 which is materially ahead of consensus expectations. Given its changing business mix and different margin profile, execution is the key risk. If achieved, FLT is materially undervalued.
• We view the placement and SPP price as attractive (FY25 recovery PE of 11.7x) and encourage investors to take up their allocation. We maintain a Hold rating with a new (login to view) price target.

Strategic acquisition of UK-based luxury travel business, Scott Dunn

At the end of February, FLT will acquire Scott Dunn for A$210m, equivalent to 9.6x EV/EBITDA (FY23F pro-forma) pre-synergies. Scott Dunn is a multi-award winning luxury travel business. We note FLT is purchasing the business from PE.

Deal funded by A$180m capital raising plus A$40m of existing cash

The acquisition will be funded by a A$180m underwritten institutional placement and A$40m of cash. In addition, FLT may raise up to A$40m through a non-underwritten SPP. The offer price is A$14.60 per share.

The transaction is expected to be mid-teens percentage EPS accretive in the 12 months to 30 June 2023, on a proforma basis. This is also prior to the realisation of synergies and the impact of one-off transactional costs (~A$10m).

We note this EPS accretion is calculated off FLT’s depressed (albeit still recovering) FY23 earnings. It also excludes dilution from the SPP. In FY24/25 (a better reflection of FLT’s normalised earnings), the transaction is only mildly EPS accretive.

1H23 result beats; FY23 guidance below MorgansF but in line with consensus

1H23 group TTV of A$9.9bn was above MorgansF of A$9.25bn and Visible Alpha (VA) consensus of A$9.2bn. Revenue of A$1.0bn was greater than MorgansF of A$907.5m vs VA of A$907.3m. Pleasingly, EBITDA of A$95m, beat guidance of A$70-90m, MorgansF of A$90m and VA of A$81.0m. The operating cash outflow of A$65m was better than MorgansF of A$91.6m.

The 1H23 beat to consensus was led by the strong profitability of Corporate. This business is on track to deliver record TTV in FY23 (MorgansF is ~A$11.6bn vs pre-COVID of A$9.0bn). November EBITDA was in line with the monthly run rate implied at the AGM (A$14.5m/month). December EBITDA was lower given usual seasonality.

If we conservatively assume December EBITDA was A$7.5m, this would equate to 1H23 Corporate EBITDA of ~A$80m. FLT is continuing to gain market share through high customer retention rates and material new account wins.

New client wins totalled A$1.3bn in the 1H23. Recent large contract wins are continuing to be onboarded and have not been fully run-rated in the 1H23 result. 

FLT has provided FY23 EBITDA guidance of A$250-280m. This was below Morgans previous forecast of A$289.5m. However it was largely at the midpoint of FactSet consensus of A$266.3m. This guidance is prior to any benefits from the acquisition. The midpoint of guidance implies a 35%/65% 1H vs 2H split, which is broadly in line with FLT’s historical seasonality.

FLT reiterated it is targeting a 2% NPBT margin by FY25. This implies NPBT of A$475m, up 38% on FY19 of A$343m. This is well ahead of consensus and MorgansF of A$369.3m. A lower cost margin is expected to more than offset a lower revenue margin.

Forecast and valuation changes

Given FLT’s FY23 EBITDA guidance was below our forecast, we have revised it down to the top end of guidance and included A$7.5m of EBITDA from Scott Dunn for the four months under FLT’s ownership (in line with guidance of A$7-8m).

In FY24 and FY25, we have increased our EBITDA forecasts by 6.0% and 5.5% respectively reflecting the Scott Dunn acquisition. However given the dilution from the equity raising and SPP, our EPS forecasts have risen by only 1.8% and 0.4%.

Given the dilution of the placement and SPP and lower net cash balances, our blended valuation has fallen to (login to view).

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