Firstly let me say that anyone that thinks they know exactly how this industry is going to play out, is a fool. I have a few businesses in my fairly concentrated portfolio that are experiencing what could perhaps best be described as existential threats, and I would be lying if I said that I haven't being feeling any angst.
We have to remember that FLT is a business that operates on very slender margins, and there are many moving parts that can influence those margins. One of those moving parts, I suspect, is the rate of growth of outbound departures. Whilst total departures have been growing at healthy recent rates, resident short-term departures have been slowing. These are more likely to be representative of FLT's domestic revenues.
See the following growth rates:
Column 1
Column 2
Column 3
Column 4
0
FY
all departures
resident short-term departures
FLT domestic TTV
1
2011
7.0%
10%
12%
2
2012
4.7%
8.0%
9.4%
3
2013
4.9%
4.9%
8.6%
4
2014
7.4%
6.5%
7.0%
5
2015
3.9%
3.2%
4.9%
6
2016
6.5%
4.5%
5.1%
7
H1 2017 (vs pcp)
8.0%
4.8%
4.6%
The other moving part is the income margin. The income margin (fees and commissions vs TTV) for global operations dipped in H1 2017 from a fairly steady an average of about 13.6% in the prior 3 FY's (according to my own numbers), to about 13.4% in the H1 FY17 period. This does not seem like much (and I'm certainly not going to lose sleep over it), but for a business that has an EBIT margin to TTV in the order of 2%, these sorts of fluctuations have a big impact on the bottom line.
The other moving part is the operating costs. Over the FY's 2011 to 2015, the cost-to-TTV margin stood steady at about 11.5%. In FY 2016 it rose to 11.8%, and in the H1 FY2017 period, my numbers indicate it has risen to about 12%. It is interesting that staff numbers have been growing substantially over the period, right through to H1 FY2017 (according my my estimates). When you consider that employee costs are far and away the biggest expense item, pressure on margins is perhaps not all that surprising.
Another moving part is overseas operations, in particular Europe (predominantly the UK). This now contributes nearly 10% to TTV and in the order of 14% to EBIT. Whilst TTV here declined substantially in AUD terms, it actually grew strongly in local currency terms.
Clearly, any one of the above factors will have a big impact on earnings. Put them all together, and they have a very big impact.
That's not to say that I am denying that FLT is facing serious challenges and an uncertain future. However, despite all these challenges, the business is in rude financial health, and despite having net cash-to-equity of close to 50% (after adjusting for client cash), is still generating underlying earnings-to-equity of over 15% (according to my estimates). On a cash adjusted basis (0.7xEBIT/[E+D-C]) it is generating a return of over well over 30%.
As to the suggestion that they are on an "acquisition spree", I couldn't disagree more. In fact, considering the amount of cash they hold, and the challenges faced by the industry, I find it quite remarkable how little they are spending on acquisitions. Consider that in the 5 years ending June 2016, the business generated $1660m in operating cash flow, of which about $185m was provided by customer prepayments (another attractive feature of the FLT business). Conservatively adjusting this operating cash flow for this negative working capital feature, the business generated over $1470m of which a total of under $430m was consumed by investments. And that's all investments, including capex and acquisitions. So that's a cash consumption rate of about 30%.
So as challenged as the landscape looks, I just can help but be attracted to a business that spews free cash flow like Mount Etna. I also can't help but think that travel, challenged or not, is going to be more and more central to our lives and that someone with smart leadership, will be able to make a go of it. Then, at the back of my mind, there is the fact that Helloworld, a business that is far more challenged than FLT, still commands TTV that amount to over half that of FLT's domestic TTV.
FLT Price at posting:
$36.20 Sentiment: None Disclosure: Held
(20min delay)
