Flight Centre Travel: Scale benefits should start to be seen from 2H
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 23 February 2023, 7:30 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- There wasn't a lot new with Flight Centre Travel's (ASX:FLT) 1H23 result given the headline numbers were disclosed with its recent acquisition of luxury leisure business, Scott Dunn.
- FY23 guidance and its FY26 NPBT margin target was reiterated. We have made minor changes to our forecasts for higher D&A and net interest.
- We maintain a Hold rating with a new (login to view) price target. However we note that if FLT achieves its margin targets in FY26, there is material upside to consensus earnings and the stock is extremely undervalued. Given its changing business mix and different margin profile, execution is the key risk.
1H23 result is in line with recent update
TTV was A$9.9bn, revenue was A$1.0bn (revenue margin was low at 10.1%), underlying EBITDA increased to A$95.1m, NPBT was a loss of A$0.2m and NPAT was a loss of A$2.5m. Higher D&A and net interest (including A$24.4m associated with the convertible notes) were a drag on the bottom line.
Net cash was A$464.8m (excludes convertible notes).
Corporate result was strong and lead the industry
The result was led by a strong Corporate result which is leading the industry in terms of its strong recovery (TTV of A$5.0bn was 103% of pre-COVID) given the huge amount of new business it won during the pandemic.
In the 1H23, FLT reported TTV of A$1.6bn from ANZ, A$1.4bn from EMEA, A$1.6bn from the US and A$0.6bn from Asia. We note FLT was ahead of CTD across all regions. CTD's 1H23 TTV in ANZ was A$1.3bn, US was A$1.4bn, Europe was A$0.9bn and Asia was A$0.5bn.
FLT said that ANZ and EMEA generated record 1H TTV, while the US finished just below its record 1H20 contribution. New client wins totalled A$1.25bn in the 1H23. Following China's reopening, FLT's volumes in Asia are now tracking above pre-COVID levels.
This business unit is comfortably on track to deliver record TTV in FY23 (FY19 was A$8.9bn). Morgans forecast is A$11.0bn. 1H23 Corporate underlying EBITDA and NPBT were A$79.6m and A$54.1m.
Leisure lags and Other reports a large loss
Leisure experienced a strong 2Q23. Its 1H23 TTV was A$4.4bn or 71% of pre-COVID levels. However its revenue margin remains low given business mix. Its EBITDA was A$43.4m and NPBT was only A$1.7m.
FLT highlighted how its consultant productivity remains much higher vs pre-COVID and is expected to remain above pre-COVID levels in the future. Other (head office costs, experience businesses, Pedal Group) EBITDA was a loss of A$27.9m and NPBT was a loss of A$55.9m (further impacted by the convertible notes).
Reiterates FY23 guidance and NPBT margin target (now by the end of FY25)
FLT reiterated its FY23 EBITDA guidance of A$250-280m. This guidance is prior to any benefits from the Scott Dunn acquisition (FLT expects it to contribute A$6- 8m of EBITDA in 2H). The midpoint of guidance implies a 35%/65% 1H vs 2H split, which is broadly in line with FLT's historical seasonality.
FLT said the bottom end of guidance assumes a slowdown in travel demand due to weakening macro-economic conditions. Given there is no evidence of a slowdown at this stage, we think this is a conservative assumption.
The Leisure business is currently trading at post-COVID highs and Corporate travel activity is now escalating after the traditional holiday period. FLT noted that airline capacity is also gradually recovering, which is expected to deliver cheaper fares and increased volumes.
The Board has initiated a review of FLT’s capital structures. It said that the review will consider the business’s cash requirements to fund growth, shareholder returns and debt structures, including the company’s convertible notes.
FLT reiterated its 2% NPBT/TTV margin target by the end of FY25 (fully seen in FY26). Morgans and consensus are materially below this.
Our EBITDA forecasts are unchanged however our NPBT forecasts have fallen 8.4%/2.0%/0.7% in FY23/24/25 due to higher D&A and net interest expense.
Our FY23 EBITDA forecast remains at the top end of guidance and includes A$7.5m of EBITDA from Scott Dunn (in line with guidance of A$7-8m).
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