Is Flight Centre part of the recovery theme?
In this week’s video insight Roger discusses Flight Centre (ASX:FLT). This week Flight Centre saw its stock jump more than five per cent on the day it declared travel is recovering slightly faster than expected, and consequently, its losses should be smaller. Is the share price prematurely pricing in a recovery?
Transcript
Roger Montgomery:
Back in May, with international airline capacity sitting at around 40 per cent, and amid expectations it would rise to 60-70 per cent by September, young people’s travel plans were limited only by available flights and their cost. Nevertheless, their intent then and since has been unmistakable.
According to Webjet a genuine shift has occurred in the cohorts willing to risk travel, with 25 to 35 year-olds the largest cohort of international travellers, having overtaken 45 to 55 year-olds, who held the honour pre-pandemic. Indeed the trend is reflected in my own family with my eldest son traveling overseas twice this year already, while my own travel for both work and leisure has remained domestic.
With COVID impacting older Australian’s more severely than the young, the development is perhaps unsurprising.
Overall travel still remains well down compared to 2019 but it’s changing albeit there are some nuances worth calling out.
This week listed travel operator Flight Centre (ASX:FLT) saw its stock jump more than five per cent on the day it declared travel is recovering slightly faster than expected, and consequently, its losses should be smaller. The company upgraded its FY22 EBITDA profit guidance to a loss of between $180 to $190 million. This compares to initial expectations for losses of between $195 and $225 million.
Perhaps even more importantly, the company said the changes reflects a stronger-than-expected June quarter period, where the company is in fact now profitable at the EBITDA level.
Flight Centre’s shares have rallied 14 per cent in the last six months, which doesn’t seem significant until it is compared to the S&P/ASX200 over the same period. With the index down half a per cent over six months, the 14 per cent gain for Flight Centre reflects a significant shift in sentiment towards non-airline travel operators.
The company also reported strong demand and substantially higher ticket prices resulting in total transaction volume of $10 billion for the year, which was better than many analysts had anticipated, and equated to 42 per cent of FY19 levels.
On a monthly basis, a number of Flight Centre’s businesses are now tracking at or above pre-COVID levels, which is encouraging but gross margins have some room to catch up to pre-pandemic levels. This is due to the mix of travel with the company revealing a greater weighting to domestic and corporate travel, while the rising international travel is dominated by visits to friends and family which lacks the opportunity to upsell further journeys or superior accommodation.
FLT’s previous key profit metric was Net Profit Before Tax and despite the improving financials the mid-point of second half guidance suggests a net profit before tax of just under $90 million.
And to be fair, trading conditions remain tough – COVID infections and hospitalisations are accelerating again, finding and training staff is complex – there’s a shortage of travel agents, airline, airport and hotel staff, and Airlines – as I mentioned earlier – are limiting capacity while commissions on international travel are under pressure. This has promoted some analysts to suggest a full recovery to FY19 levels may not occur until 2025. And remember the company issued a lot of shares to survive at the commencement of the COVID pandemic.
Flight Centre will report its full year results on August 25 and investors can expect an update on conditions in the travel industry as well as the company’s outlook. Meanwhile the tussle between short sellers – who believe the share price is prematurely pricing in a recovery – and retail investors, who are buying the recovery theme, will continue.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
