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Why Has Flight Centre Has Disappointed Shareholders This Year?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Flight Centre (ASX: FLT) is one of Australia’s largest operators of travel agencies and has sizeable operations across both business and leisure travel. The firm is particularly useful for corporates that have set travel policies since it can act as a one-stop-shop for arranging travel plans. That way, booking airfares and hotels is not a hassle for employees, or people employed in the company’s administration function.

Flight Center - shareholders

The beauty of the business model is that customers do not necessarily have to pay more for the service. This is because Flight Centre can buy airline tickets, hotel rooms and other products in bulk, before selling it to consumers at a mark-up that they would have paid anyway. Since airlines know that Flight Centre has paid for a certain number of tickets in advance, they can do business with increased certainty around their revenue. This is something companies are willing to pay for, and the pay by offering Flight Centre a discount on travel bookings. One weakness in their business model, however, is weak penetration of the online market relative to competitors. This could be a drag on future earnings, given the growth of online travel relative to the broader travel market.

Like a number of other ASX listed travel companies, Flight Centre had a week start to the year. Revenue rose by 4.5%, but NPAT was little moved on the previous year, rising 0.1% as the impact of margin compression fed through to the business. This was because of a weak leisure market, owing to lower levels of consumer confidence that were underpinned by weak wage and house price growth throughout FY19. While the market responded to upbeat commentary around the result, the stock sold off heavily on the back of a more recent profit downgrade and a weak trading update for the first few months of this year. While the tide of news may need to turn for the company to do well, earnings are already depressed, and the company’s reasonable multiples imply that most of the bad news is already in the price.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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