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Why You Should Buy Flight Centre Shares (ASX: FLT)

This article was originally published at MF & Co. Asset Management.

Flight Centre Travel Group Limited (ASX FLT) is the leading travel agency company in Australia and has grown its market share via expansion with a diversified portfolio of worldwide businesses. Flight Centre shares strong cash position allows it to continue to grow via acquisition with limited debt.

The penalties for its price-fixing arrangements might lead to weaker performance this financial year and new entrants stem from the abolishment of travel agents licensing might impose further threats on Flight Centre’s current market position.

About Flight Centre Travel Group Limited (ASX FLT)

Founded in 1982, Flight Centre is the largest retail travel outlet in Australia with a market capitalisation of $5.9 billion. The company has 2960 company-owned operations in twenty-three countries, and a corporate travel management network that spans more than ninety countries.

The portfolio consists of more than forty well-known brands, such as Student Flights, GOGO Vacations, Corporate Traveller and StudentUniverse.

Flight Centre has a dominant market position in the industry

Flight Centre is the market leader in the Australian travel agency industry. Its market capitalisation of $5.9 billion is greater than $1.358 billion of Webjet Limited (ASX WEB) and $650 million of Wotif.com Holdings Limited (ASX WTF).

Flight Centre has a geographically diversified portfolio of 2960 stores in all over the world, with 1547 business in the Australian market. The company has been growing its global market share and strengthening its diversified portfolio via a series of acquisitions.

In FY17, FLT completed seven acquisitions in different areas, such as Bespoke Hospitality Management Asia (BHMA), an emerging Thailand-based operator of design and lifestyle leisure hotels, and Olympic Tours, a Mexico-based destination management company.

Booking.com (9.3%) and Flight Centre (9%) are the two leading travel agency companies used by Australians in 2017, followed by Airbnb (4.8%), based on the survey conducted by Roy Morgan.

Although Booking.com was used slightly more than Flight Centre in 2017, Flight Centre still holds the position of the biggest player in the market with 23.4% of Australian’s saying they would consider using next time they go travelling, compared to 13.6% of Booking.com.

The dominant market position of Flight Centre shares allows for a positive forecast in the market for the future.

Penalties From ACCC For Flight Centre in April 2018

In early April 2018, Flight Centre lost a legal battle with ACCC, which involved price-fixing arrangements in Singapore, Malaysia, and Emirates Airlines between 2005 and 2009.

As a result, Flight Centre was liable for a $12.5 million penalty for carrying out the price-fixing activities.

The penalty was not a huge speed hump for Flight Centre with the average penalty imposed by Australian penalty appeal judgement is $25 million, whereas elsewhere it is over $300 million in comparison.

The $12.5 million penalty is much lower than the average and will cost Flight Centre’s 0.64% of its annual revenue.

Strong Revenue Growth and Cash Flow in the Future for ASX FLT stock

ASX FLT shares has had stable revenue growth for the past 10 years, except the slight revenue decline in FY2012, as shown in the graph below.

The stable revenue growth is mostly contributed to its expansion efforts and the rising demand for travelling.

The number of outbound Australians travellers has increased by 4.2% from 2016 to 2017, and the number is expected to increase by 4% to 10.5 million in 2018, and by 4.2% to 10.9 million in 2019.

Flight Centre Shares (ASX FLT) Revenue

ASX FLT shares also reported a strong cash position, and In FY2017 the company’s total cash and cash equivalents were $1.282 billion.

Since the cash is mostly used to fund the acquisition activities, ASX FLT shares strong free cash flow makes its expansion and acquisition strategy profitable and sustainable.

Abolishment of Travel Agents Licensing a Challenge for Flight Centre Shares

The entrance requirement has been loosened further after the abolishment of Travel Agents Licensing in December 2015.

Following the abolishment, a travel compensation fund was created by the Travel Agents Licensing, which requires a capital reserve from the travel agency to reimburse a consumer if the agency fails.

Due to the abolishment of travel agents licensing, travel agencies no longer need to have any capital reserve, lowering the entrance barriers within the travel agency industry.

Although the industry has become more competitive due to lower barriers to entry and more new entrants, Flight Centre maintained strong market share via continuous growth and acquisition after the abolishment. The dominant market position of Flight Centre is strong and will withstand increasing new entrants in the future.

Strong Financial Performance for Flight Centre in the Local and Global Market

Although the FLT stock price hit a 52-week high on May 7 with a closing price of $59.44, it has a P/E ratio of 16.76, which is much lower than the peer median at 22.46 in 2017.

Despite growth in 2014, stock performance in the past few years is much better than the average level. Flight Centre Shares (ASX FLT) PE

FLT stock ROE (16.63%) was slightly lower than the peer median (16.75%) in 2017, and is much higher than the average level in the past few years, indicating healthy investor return.

Flight Centre Shares (ASX FLT) ROE

Sustainable Growth of Flight Centre Shares

Overall, Flight Centre shares have been performing well and growing its revenue via continuous expansion, supported by its strong cash position.

Although entry requirements have been lower in the industry, Flight Centre has the capacity to tackle challenges from existing players and future entrants and maintain its dominant market position.

Flight Centre’s market position and financial performance should provide confidence in the future potential growth of its diversified businesses.

Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced,  having dealt with some of the wealthiest clients in Australia.



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