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Flight Centre To Emerge Bigger And Leaner

Australia | Apr 08 2020


Flight Centre has slashed monthly operating costs and raised capital. Brokers expect a leaner enterprise with greater market share is likely to emerge.

-A $700m capital raising and increased debt facilities provide liquidity
-Monthly operating costs reduced significantly
-Global recession expected to affect passenger demand over longer period


By Eva Brocklehurst

As travel around the world abruptly shuts down, Flight Centre Travel Group ((FLT)) has had to bring forward important decisions, enabling the business to transcend the crisis and become a more streamlined operation.

The company intends to reduce monthly operating costs to just $65m per month by the end of July, from $227m per month. The global leisure footprint will be reduced by -62% to 222 stores from 593 and the Australian leisure footprint by -45% to 516 stores from 944.

Transaction value will be lost but this will be a more efficient network, brokers suggest. The company has undertaken a $700m capital raising and increased debt facilities by $200m to cope with a high rate of working capital unwind and cancellations amid minimal revenue.

On the positive side, Flight Centre has a diversified debtor book and no material exposure to one particular customer, industry or geography. UBS estimates the company now has $756m in liquidity.

There will be $210m in one-off costs to implement the initiatives, relating to employee redundancies and the exit of leases. The company does not anticipate this will be exceeded, and may be less as it excludes any potential benefits from the JobKeeper initiative in Australia and wage subsidy in Canada.

Management expects eventually to divert lost store transactions to online, call centres and home-based agents. Flight Centre is also considering the possible sale of its Melbourne head office. Morgan Stanley anticipates the company should now have an 18-month liquidity buffer, assuming no revenue, and emphasises there is no government support included in this estimate.

Citi agrees cash burn could be less than the $65m per month run rate amid government benefits and rent relief, and suggests cash flow should return to breaking even by December 2020 as domestic travel returns.

Earnings Recovery?

March total transaction value (TTV) fell materially and was down -70-80%, expected to be down -90% in April. There is some revenue being generated through long-term travel bookings, local travel, repatriation and essential services. However, the focus is now on the timing of an earnings recovery.

Flight Centre has indicated Chinese business is re-starting as conditions there gradually return to normal and highlights the improvement in earnings margins that occurred after both the SARS epidemic and the GFC.

UBS now assumes earnings trough in 2021 before recovering through to 2023. Still, there is a low level of certainty regarding the longer-term impact of the pandemic. The broker now assesses the company is in a position to cover cash costs for a period of around 11 months, assuming no revenue.

On the positive side, those companies that are able to trade through the current crisis will emerge with a higher market share, in the broker's view. Initiatives are expected to pivot the business towards a corporate, online travel operation. This should be a long-term positive for margins.

Citi downgrades FY22 TTV by -29% to reflect a smaller store network but does not believe TTV will fall commensurate with store numbers. Growth in corporate business, which is independent of physical stores, online and market share gains are likely as the industry consolidates after the crisis. Moreover pent-up demand for travel should come once the crisis has ultimately passed.

Morgans upgrades to Add from Hold, now incorporating a large loss in FY20 and FY21 and anticipating a recovery in FY22-23. The broker does not expect the company will return to original FY20 guidance until FY24, although stresses earnings uncertainty remains high.

Flight Centre believes restrictions on domestic travel could be lifted in 2-3 months time and corporate travel start to pick up in July. International travellers are likely to take longer, returning in September/October.

The extremely attractive airfares currently on offer are expected to stimulate strong demand, although IATA (International Air Transport Association) now expects the recovery will be U-shaped rather than V-shaped as the forthcoming global recession is expected to affect passenger demand even after border restrictions are lifted.

FNArena's database has five Buy ratings and one Hold (Ord Minnett, yet to update on the capital raising). The consensus target is $15.54, signalling 54.6% upside to the last share price.

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