Flight Centre (FLT) has largely transformed its business from being predominantly mass-market leisure focused with a strong physical store presence, to now a leaner, more capital light business with a focus on independent agents and a meaningful corporate travel market share. Travel spending continues to recover post the pandemic and Total Transaction Value (TTV) for the month of March 2023 has already reached levels above pre-Covid with spending in May being ‘broadly in-line’ with 2019 levels.
Then versus now. The leisure segment in FY19 had ~1,500 stores and ~9,800 full time equivalent (FTE) consultants, generating ~$13bn in TTV. FY23 is expected to generate ~$10bn TTV with just 543 stores and ~3,500 consultants, leading to an improvement of store productivity from ~$7m to ~$13m. As travel volumes continue to increase, we expect this increased productivity to flow through to higher margins.
Balance sheet shape. FLT was a significant victim of the pandemic, requiring emergency capital raising at low prices. With the travel recovery being faster and stronger than anticipated, FLT is now generating significant levels of cash, and post the recent acquisition we estimate FLT will end the FY23 period with ~$600m+ in unrestricted net cash. The reinstatement of the dividend or other capital management initiatives looms as a likely catalyst in FY24.
Investment View
FLT has been through a significant transformation, focussing on becoming a capital light, higher margin business through the closure of its physical store networks and increased focus on independent agents. The recent acquisition of Scott Dunn in the luxury category should provide further travel resilience and increase overall group margins. FLT continues to win share in the corporate travel space and is expected to deliver a record FY23 TTV, despite the market only recovering to 70-75% of pre-Covid levels.
FLT has a significant unrestricted net cash position, which we believe will see the reintroduction of the dividend as soon as FY24. FLT is targeting an FY25 PBT margin of 2%, whereas the market is only forecasting ~1.5%. If FLT can deliver and execute its strategy, there will likely be material earnings upgrades. We initiate on FLT with a Buy recommendation.
Business Overview
Flight Centre (FLT) is a well-known Australian-based travel agency and one of the largest retail travel outlets globally. Established in 1982, the company has expanded its operations to more than 23 countries worldwide, serving both leisure and corporate travellers. FLT operates over 40 brands, across 6 key verticals in Mass Market, Luxury, Independent, Cruise & Tour, Student Travel and Foreign Exchange.
Figure 1: Flight Centre key verticals and brands
FLT’s business model includes a combination of brick-and-mortar retail stores, online platforms, and dedicated travel consultants. The company's retail stores serve as customer service centres, allowing clients to speak directly with travel experts and receive personalised assistance. FLT’s online platforms provide convenient self-service options for customers to browse and book travel arrangements, generating high margins for the business.
In addition to leisure travel, Flight Centre has a strong presence in corporate travel management. Through its Corporate Traveller and FCM Travel Solutions brands, the company offers specialized services to corporate clients, including travel policy management, expense management, and online booking tools. They aim to streamline corporate travel processes, optimise costs, and ensure traveller safety and satisfaction.
Then VS Now
FLT has considerably evolved its business over the pandemic period, moving from predominantly a leisure mass market business with a significant physical store network presence, to now a leaner, more capital light independent agent model and heavier corporate and higher margin focus.
Business Mix
In FY19, corporate was ~38% of group TTV, with leisure dominating at 58%. This has materially changed at the 1H23 result, with corporate now accounting for 51% and leisure 44%. We expect these to converge closer to 50/50 moving forward as international travel continues to ramp back up to normalised levels.
Looking at leisure vs corporate, the 1H23 result saw a significant increase in corporate TTV as a portion of overall group TTV, representing ~51%. This is a material increase from ~38% in FY19. FLT continues to win market share in the corporate travel space and is expected to deliver a record FY23 TTV, despite the market only recovering to 70-75% of pre-Covid levels. We expect FLT to continue winning share, with FLT noting that “tech” is cited as a major reason why clients choose FLT, with the ‘Melon’ platform being implemented to 95% of Corporate Traveller USA clients. FLT has added 1,000 staff added since July 2022 in its corporate division.
Figure 2: Corporate TTV larger portion in 1H23 as leisure continues to recover
Figure 3: Geographic mix similar to FY19. ANZ expected to continue being largest portion
The leisure business has been materially transformed over the last 3 years. It has considerably lowered its full-time equivalent (FTE) consultants from ~9,800 to ~3,500 and the number of stores from ~1,500 to 543 in FY23. The FY24 TTV forecast from FLT is seeing a considerable shift from Mass towards Independent and Luxury.
Figure 4: FY19 vs FY24 expected TTV splits for the leisure segment. Luxury and Independent set to be more significant.
FLT presented a plausible FY23 scenario, where if it generates $10bn in TTV, it would equate to an uplift of ~$6m in store productivity (average TTV per store). If FLT delivers $10bn in TTV for FY23, it will have achieved ~80% of FY19 TTV with just ~36% of the consultants and stores. The Independent Network is now ~15% of TTV, equivalent to ~210 shops and ~1,400 consultants in the old world.
Online sales also continue to grow from $1.3bn in FY19 to a forecast $1.6bn in FY23. The growth is equivalent to ~40 shops or ~270 consultants. 40% of leisure TTV is now made up via online, independent & luxury brands vs 20% pre-Covid. FLT has however started to re-roll out its consultant network, hiring ~100 new consultants per month to meet the current and anticipated future demand. FLT commented that its overall leisure market share was maintained during the pandemic.
Figure 5: FY23 leisure TTV set to be much more productive than FY19
What does the new mix mean for margins?
The leisure category is a mix of both in-store and online, as well as a mix between independent and luxury brands. We focus on both EBITDA margins as well as Profit Before Tax (PBT) as a % of TTV margins given the different profiles per segment.
Independent agents utilise FLT’s software and deals, which is high earnings/EBITDA margin for FLT, however as a % of TTV, is dilutive to the group margin. As this channel becomes a larger mix of TTV, the key PBT margin will be impacted, however given the capital light nature of independents, we expect cash flow to benefit.
Leisure also includes luxury travel, with key brand Travel Associates now being complemented by the recent acquisition of Scott Dunn. Luxury is inherently a higher margin business as well as higher TTV per customer. The Scott Dunn acquisition will be forefront of investors’ focus for the FY23 result to see if synergies have started to filter through. The business is expected to positively increase EBITDA margins in the luxury segment from ~28% to ~35% on a pro forma basis. This is well above the current underlying group EBITDA of ~9%. Luxury is typically also more defensive and provides valuable exposure to the US and UK markets. We view expanding in the luxury segment as a solid strategy to improve the group’s earnings profile.
Looking at the EBITDA margin profile of the group over time, FLT’s margin had been under pressure from FY13 onwards given an expensive continued store network rollout. A new leaner business model should see margins improve, with consensus forecasting EBITDA margins to reach >20% by FY26.
Figure 6: EBITDA margins forecast to exceed >20% in FY26e
Revenue margin as a % of TTV is also likely to be under pressure with the increased focus on independent agents, albeit marginally offset by a higher luxury leisure mix.
Figure 7: Revenue margin lower than pre-Covid given lower airline commissions and business mix
Is the 2% target PBT margin by FY25 achievable?
FLT has stated it expects PBT to reach 2% of TTV by FY25, which is well above consensus expectations of ~1.5%. We note that FLT last achieved this margin in FY15. With a physical store network ~60% lower than FY19 and a significant portion of costs taken out of the business, we expect operating costs to be much lower than pre-Covid levels, despite higher TTV. Whilst the revenue margin has been impacted by a higher mix of independent agent TTV, this is much higher EBITDA margin when comparing to actual revenue, rather than to TTV.
Figure 8: PBT/TTV margins only forecast to reach ~1.5% in FY25, far lower than the 2% target
On a divisional basis, FLT only split out corporate vs leisure earnings in FY19, where corporate saw PBT margins at 3.0% and leisure was at 0.9%. FLT did provide more context in its recent market update, where it expects certain sections within leisure to be above and below the 2% target. The Flight Centre shop network, luxury brands Scott Dunn and Travel Associates are all expected to be above the 2% PBT margin, offset by independent agents, student universe, BYO jet and travel money. As we expect luxury to be more resilient and grow above system, we should expect continued margin improvement. With FLT continuing to execute on its strategy, there is considerable upside risks to earnings if FLT can improve margins.
Balance Sheet
The capital raise for survival during the pandemic and then recent raise for an acquisition saw shares on issue rise from ~101m in FY19 to now over ~212m. Whilst FLT has added additional TTV and earnings from acquisitions, even if NPAT reaches FY19 levels, earnings per share will be ~50%+ lower than FY19 levels given the much higher share count. We therefore see it difficult for FLT to return to FY19 level share prices, without significant earnings growth. The dilution has already occurred however, so we prefer to look forward.
At the 1H23 result, FLT had a net cash position of $464m, however this excludes the convertible notes and lease liabilities. FLT in March 2023 raised an additional $240m to fund the acquisition of Scott Dunn at a cost of $211m. We expect FLT to continue to be cash flow generative given the travel recovery is largely complete and FLT is back to earning solid margins.
Looking to the FY23 result, we expect there to be ~$600m in unrestricted net cash on the balance sheet for FLT. Historically, FLT paid a dividend at ~60% of its EPS. We are not anticipating a return of the dividend at the FY23 result, however there is significant scope for one to be implemented, or at least another capital management program. This would be a key catalyst signifying management and the board’s confidence that the business is back to its full operating run rate.
FLT also raised funds through 2 convertible bond issuances in 2020 and 2021 with a combined face value of $800m. Tranche 1 consists of ~19.9m shares that can be converted at $20.07 and tranche 2 consists of ~14.7m converted at $27.30. The additional ~35m potential share issuance would be a ~14% dilution, increasing shares on issue from ~212m to ~247m. The coupon payments on these convertible notes are far below equivalent bank rates at just 2.5% and 1.625% respectively and are not due to mature until 2027 and 2028. Given these coupons are relatively low and that FLT is returning to positive cash flow, we don’t believe the convertibles will have an impact on FLT’s ability to pay a dividend.
FY23 Preview
FLT provided a strategy update in June, reaffirming its EBTIDA guidance of $270-290m including the 3 months of Scott Dunn acquisition. The market recovery continues, with demand rebounding and trading conditions starting to normalise, although airfares remain significantly above pre-Covid levels. There have been no obvious signs of slowdown flowing from the recent macro-economic changes. The corporate sector continues to outpace the recovery, delivering record TTV despite client activity tracking at 70-80% of pre-Covid levels. Leisure was broadly in-line with pre-Covid levels in May after being ahead of pre-Covid in March, implying some potential slowdown. We don’t expect any material surprises at the FY23 result given guidance provided just recently, with the focus being on the acquisition synergies and the FY24 outlook, which we expect will be positive.
International travel capacity is only just below FY19 levels, and we expect this to continue to move towards historic levels and above through FY24. Short term resident departure data from the ABS has shown a meaningful recovery through 2022 and into 2023. We expect this number to return towards the growth trends seen through the last 2 decades.
Figure 9: International capacity recovering to FY19 baseline
Figure 10: Short-term resident international departures slowly returning to pre-Covid trend
Valuation Considerations
FLT’s net income isn’t expected to reach FY19 levels until FY25. We however believe there is upside risks to consensus numbers given that some months TTV is already above FY19 levels. Looking out to FY25, consensus is looking at TTV of ~5-10% above FY19 levels, with a PBT margin of ~1.5%.
Assuming a flat tax rate of ~25%, we can look at a range of scenarios based on TTV and PBT margin. If FLT hits its 2% target and reaches TTV 10% above FY19 levels which is plausible, we could see FY25 EPS of $1.85, which is ~40% above consensus of ~$1.30.
Similarly, if we look at different EPS levels and associated PE ratios, at consensus $1.30 and historical pre-Covid average PER of ~16x, FLT could be worth ~$21.00 per share. We believe there to be material upside risk to consensus numbers on an FY25 target basis, and even a more conservative 1.7% and 5% TTV growth would imply an EPS of ~$1.54, ~18% above consensus. We also note that given FLT is likely to be a higher margin business in FY25 and beyond, it could command a higher multiple.
Figure 11: Consensus scenario is for ~$1.30 FY25 eps
Figure 12: FY25 PER scenario analysis
Investment View
FLT has been through a significant transformation, focussing on becoming a capital light, higher margin business through the closure of its physical store networks and increased focus on independent agents. The recent acquisition of Scott Dunn in the luxury category should provide further travel resilience and increase overall group margins. FLT continues to win share in the corporate travel space and is expected to deliver a record FY23 TTV, despite the market only recovering to 70-75% of pre-Covid levels.
As the economy and travel demand continues to recover, FLT is now forecast to generate free cash flows in excess of pre-Covid levels, with higher earnings margins as the business has rationalised its cost base. FLT has a significant unrestricted net cash position which we estimate to reach ~$600m in FY23, and we therefore believe we will see the reintroduction of the dividend as soon as FY24. It raised an additional $20m than anticipate through the oversubscription of the share purchase plan, which it will likely use to pay down debt. FLT is currently trading on an FY24 free cash flow yield of ~4%. FLT is targeting an FY25 PBT margin of 2%, whereas the market is only forecasting ~1.5%. If FLT can deliver and execute its strategy, there will likely be material earnings upgrades, meaning the current PER of 19x should fall lower towards a pre-Covid average of ~16x. We initiate on FLT with a Buy recommendation.
Risks to Investment View
Recommendation
We commence coverage on FLT with a Buy recommendation.
Figure 13: Listed travel comparables
Figure 14: Historical PER with Covid period removed
Figure 15: Historical EV/EBITDA with averages calculated on a pre-Covid basis
