Flight Centre Flags Coronavirus Hazard

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

Flight Centre has acknowledged coronavirus is starting to impact on travel plans, which creates uncertainty over the outlook for the second half.

-Chinese corporate business being negatively impacted by coronavirus
-Australian leisure outbound volumes may also be affected
-Possibility of a strong rebound in travel volumes when virus concerns allayed
 

By Eva Brocklehurst

Flight Centre's ((FLT)) update may have calmed expectations for the first half but brokers are nervous about the second half, as the company acknowledges the outbreak of coronavirus is starting to have an impact. This adds to a growing list of issues confronting Flight Centre and increases the probability of further downgrades to current guidance for FY20, in Citi's view.

The company now expects pre-tax profit of $100-105m in the first half, with the mid point slightly higher than the prior $90-110m guidance. FY20 guidance is for $310-350m in pre-tax profit. Flight Centre has pointed out that Brexit, US/China trade wars, unrest in Hong Kong and Dominican Republic as well as poor consumer confidence all weighed on the first half results.

While coronavirus is affecting second half travel patterns the company finds it difficult to judge the potential impact. It appears the virus has negatively affected the corporate business in greater China and Singapore, which represents 2.5% of total transaction value for the group.

This could have flow-on effects on outbound leisure and corporate travel in other regions, and Flight Centre has indicated that its leisure business, hotels and resorts are also likely to be affected.

The Chinese corporate business may be only a small percentage, but Macquarie believes other factors are also affecting the downgrade, pointing out travel industry contacts have indicated that January and the second half of December were the worst in memory in the local travel industry.

Ord Minnett observes the market has made a decision to sell first and ask questions later with regard to the coronavirus. However, history suggests the issue will be resolved and normal operating conditions will return within a relatively short timeframe.

Outbound travel from Australia is holding up reasonably well but the broker is alert for any worsening. As Flight Centre has risk exposure across multiple lines, importantly offshore corporate, Ord Minnett takes a cautious approach and downgrades to Hold from Buy.

Citi points out the company's Australian corporate business is skewed towards domestic travel, but from a leisure perspective Australian outbound volumes will likely be affected by travel restrictions.

This has the potential to affect demand, or move more business towards domestic travel. The broker acknowledges the one-off nature of the impact and notes the SARS experience indicated a decline in travel volume precedes a period of catching up where activity increases materially.

Morgan Stanley is encouraged by the upgrade to first half estimates, albeit slight and assesses there is upside in the medium term. UBS, too, assesses the stock offers an attractive risk/reward, highlighting Flight Centre is winning share and has the advantage of a strong balance sheet. UBS maintains earnings forecasts pending further clarity at the first half result on February 27.

FNArena's database has a target of $43.27, signalling 12.1% upside to the last share price. Targets range from $39.00 (Macquarie) to $50.50 (UBS). There are two Buy ratings and five Hold.

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