Change Unfolding

Flight Centre now expects FY17 pre-tax net profit at the top end of its $300–330 million guidance range, leading Ord Minnett to upgrade its earnings forecasts and raise its recommendation to Buy.

 

Of more interest to us, however, is the change that appears to be occurring at the company. We consider Flight Centre a revenue-centric business with a ‘build it and they will come’ approach – add sales agents, sell more travel and deliver earnings growth.

 

This model delivered stellar results given the structural shift to outbound holiday travel that has occurred over the past 10 years, but became highly challenged when the industry was subjected to a material and sustained decline in international airfares.

 

Flight Centre appears to have responded by undertaking a major review of the business, or ‘transformation program’, with efficiency improvements/cost synergies a likely outcome.

 

Official data and industry sources point to a short-term bottoming in international airfares, which is highly significant given the sale of outbound holiday travel from Australia remains the largest driver of Flight Centre’s earnings. At the same time, short-term holiday departures remain solid, with annual growth of 4.4% pa.

 

Following the company’s revised guidance and outlook commentary, we have increased our earnings estimates by 11% in FY17, 16% in FY18 and 20% in FY19.

 

We have raised our recommendation to Buy based on an improved earnings outlook driven by a stabilisation in international airfares and likely cost reductions. We have increased our price target to $48.57 from $31.06 due largely to our earnings revisions.

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