Reaching cruising altitude

RESULTS ANALYSIS

Need To Know

• Result in-line with guidance provided in late July. No numerical FY24 guidance provided, but outlook remains strong. FLT expect to provide more formal guidance at the AGM in mid November
• New capital management framework introduced, including reinstatement of the dividend
• FY25 target of 2% PBT still in place, but may be slightly more challenging to achieve on current business mix

FY23 result overview vs consensus:

Revenue $2,281m vs $2,259m

Underlying EBITDA $301.6m vs $300m

Underlying PBT $106m vs $108m

DPS 18cps v 0 expected

Investment Implications

FLT is approaching cruising altitude, with investments over the pandemic period paying off with significant client wins, and the business reaching 'right-size'. Total Transaction Value (TTV) and EBITDA came in-line with prior guidance delivered in July at ~$22bn and $301.6m, with both engines of Corporate and Leisure firing. FLT also introduced a new capital management framework, including a reinstatement of its dividend, signalling the boards intention to focus on shareholder returns after a significant period of reinventing itself. This also included the potential buying back of its convertible bonds, which could potentially dilute shares on issue by ~16%, although no specific guidance or timeline was put onto this.

Corporate client wins during the pandemic period are beginning to pay off, with ~$4bn of the $11bn TTV coming from new clients. Further, new client wins during the FY23 period are also expected to help offset lower average activity per client, which are tracking to 70-75% of pre-Covid levels. Profit Before Tax (PBT) margins improved in the 2H23 to 1.5% of TTV and is expected to continue to grow with productivity initiatives beginning to take shape, however at slightly slower rates than previously anticipated due to business mix. We expect FLT can address this with continued client wins and productivity gains. Income per transaction is 10% higher than FY22 and costs are 10% lower, which is where FLT is focusing on improving margins into FY24 and beyond. Customer retention remained strong at 96%.

Leisure momentum was evident in 2H23 as TTV and margins improved on increased demand. The 2H23 exit PBT margin of ~1.8% was delivered through efficiency and productivity gains across the network. FLT added nearly ~1k consultants during the year as it continues to right-size the business and offer a higher service model. Luxury and ancillary revenues also performed strongly during the period. This was evidenced by larger basket sizes per transaction. FLT also provided a breakdown of its user demographics, where it noted that the impact of higher interest rates has been less felt across its main clients in the over 50+ age category.

The outlook was qualitative in nature, with FLT noting trading conditions for the early FY24 are in-line with its expectations. As international travel capacity returns, FLT expect to benefit from this. Margin exit rates are strong, and FLT expect this to continue, although it is dependent on the business mix, including the underperforming ‘other’ category, which includes some wholesaling brands and other travel related businesses such as bike rentals. Corporate continues to be the standout, with continued client wins likely to sustain growth, despite potential lower activity per client. FLT is set to provide a more formal guidance update at its AGM in mid-November.

Investment View

The FY23 result continues to demonstrate the recovery momentum in FLT and is reflected in continued client wins in the Corporate segment, as well as resilient travel demand in Leisure. The introduction of a capital management framework is an important step in resolving potential dilution from the convertible notes, and the reintroduction of the dividend confirms the boards intention to refocus its attention on shareholder returns after a significant period of reinvigorating the business, although still retaining flexibility to reinvest.

We expect continued margin momentum from productivity gains and from new corporate client wins, underpinned by a strong customer retention rate of ~96%. The 2% PBT target margin by FY25 remains intact, and management note it has a ‘clear path’ to achieving it, however it may remain a challenge. The market is still forecasting ~1.7-1.8% by FY25, meaning that there is significant upside for FLT if it can achieve its ambition. We believe it can and this underpins our Buy rating.