Treasure Chest: Flight Centre Too Lofty

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED. For more info SHARE ANALYSIS: FLT

The share price run for Flight Centre looks overdone given the outlook, brokers believe.

-Shares are up 42% since March
-Multiple above historic levels
-Weak consumer suggests slowing growth

By Greg Peel

Travel agent Flight Centre ((FLT)) has been slow to adapt from its bricks & mortar incumbency into the modern world of online travel bookings. But more recently the company has addressed the issue and has managed to gain market share as Australian departures remain healthy despite a lower currency.

Airline competition has nevertheless led to ticket price deflation over the year but investors have taken heart that Flight Centre’s cost reduction measures are sufficient to offset weaker margins. Subsequently, the share price has run up 25% year to date, UBS observes. In fact, having dipped earlier in the year, Flight Centre shares have run up 42% since March.

By May, brokers were already beginning to question the stock price run. Morgan Stanley (Underweight) suggested cost reductions would need to be pretty significant to achieve FY18 consensus expectations. Deutsche Bank (Hold) acknowledged healthy departure rates but believed these were only a reflection of lower air fares, which imply weaker margins and growth.

Morgan Stanley reiterated its Underweight rating in June, in recognition of weakening consumer environment.

UBS this morning has also pointed to a “more sombre” outlook for the Australian discretionary retail environment, noting that Australian leisure travel accounts for around half of Flight Centre’s profit. The good news is air fare price deflation has begun to moderate. While this may support margins, a weak consumer is not going to provide any revenue boost if air fares stop getting cheaper.

Rising fuel and electricity costs, out of cycle mortgage rate increases and a softening housing market all bode poorly for discretionary spending in FY18, UBS suggests. As the RBA keeps warning us, Australians are up to their necks in debt. Spending does not get much more discretionary than an overseas holiday.

UBS cannot see the potential for earnings growth ahead that would support the stock’s current valuation. Flight Centre historically trades at a -14% discount to the ASX Industrials ex-Financials and is currently trading at a -5% discount.

The broker has raised its target price to $37.60 from $36.10 but this is still short of the current price, hence a downgrade to Hold.

Morgan Stanley’s target is a far more pessimistic $25.00. The UBS downgrade means the only broker left with a Buy (or equivalent) rating for Flight Centre out of the eight FNArena database brokers covering the stock is Credit Suisse, who hasn’t updated since the February result.

Indeed, only four brokers have updated since February and only two in the past three months. We currently have one Buy, five Holds and two Sells on the database for a consensus target of $30.93.
 

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