From Intersuisse today:Flight Centre FLT Thursday, 19 June...

From Intersuisse today:

Flight Centre FLT Thursday, 19 June 2008

Profit Upgrade in a Tough Market

Recommendation Accumulate for Long Term Growth

Investment Overview
FLT has differentiated its brand into a number of market segments including
retail, wholesale, corporate and online. Discount airlines intensify price
competition driving down the cost of air travel and lowering commissions to
travel agents. FLT is changing its mix of businesses towards higher margin
activities to compensate for lower airfare commissions.
Profit Upgrade
• FLT produced normalised pre-tax profit of $151.6m in FY07, at the 1H08
result management forecast this to rise to $200m for FY08. FLT now upgrade
and expect this figure to exceed $210m (up 38%).
• FLT says with the opportunities we have for further improvement overseas,
we would be disappointed if we did not achieve 10% - 15% pretax profit
growth for FY09.
• A bold statement given the economic data indicates profit growth for
consumer discretionary companies to be very difficult for FY09. Oil prices
continue to rise and the discretionary dollar tightens, so strong macroeconomic
pressures are placing downward pressure on the company’s
earnings. The question is can Flight Centre continue such strong growth in
the FY09 and beyond? We subscribe to the view that earning will continue to
grow, but the company will be more reliant upon expansion given ticket
margins are expected to continue to decline.
Profit growth is centred on a four pronged strategy
The economy remains strong with record employment and a general desire for
employees to make the most of limited holiday time. The booming resource
industry is offsetting weakness from other sectors. The strong AUD has
encouraged outbound tourism. The US is a popular destination. These outbound
travel destinations are bigger ticket items and result in a higher booking fee.
Airfares are affordable with discounted fares still available on domestic and
international routes, as the average cost of on airfare to London costs two weeks
of an average wage, compare to ten years ago when the cost was three months.
FLT’s profit growth is centred on its four-pronged strategy to grow sales.
1) Reinvesting capital back into expanding the mainstream retail and
corporate travel business. FLT has set aside $60m for FY09 to spend on
expansion initiatives.
2) Save cost and lift margins by consolidating its wholesale travel businesses.
Recent acquisitions of GoGo WorlwideVacations and Travelspirit Group will
be integrated into FLT’s organically grown Infinity Holidays.
3) Expand and develop niche travel businesses to further diversify revenues,
such as cruises.
4) Leverage its business model into non-travel businesses. FLT has
developed a team based structure with outcome-based individual
incentives. FLT has created a partnership with a recruitment firm and is
also a cycle wholesaler for Merida, although little return from its $5m
investment is expected in the short to mid term.
Recommendation
We retain our Accumulate for Long Term Growth Recommendation, but state
that macroeconomic factors will increase price volatility, so FLT should only be
considered by the more risk-tolerant investor.