Many readers would be aware that Flight Centre Travel Group Ltd (ASX: FLT) (Flight Centre) is a leading travel agency in Australia. However it is now a truly global company, with business operations in 23 countries and corporate travel management operations reaching 90 countries.
Management Team & Performance
Flight Centre is led by CEO Graham “Skroo” Turner who co-founded the company decades ago in 1982. How he gained his nickname and his fascinating and entrepreneurial background can be read in more detail on his personal website.
Over the years he has created tremendous shareholder value. Flight Centre has generated a 10-year total shareholder return of 26% per annum.
This compares very favourably against the 10-year total return of 11% per annum generated by the S&P/ASX 200. Outperformance has been driven by strong financial results.
According to data from Morningstar, Flight Centre’s return on equity has ranged between 16% and 24% from 2009 to 2018. Over this time period, earnings per share have grown at an impressive compound annual growth rate (CAGR) of 11.42%.
Is Flight Centre Travel Group a buy?
At the time of writing, Flight Centre shares trade around $45.
Below, I detail how I arrive at my final valuation for Flight Centre shares and why it could still represent compelling value today.
Assuming a required annual return of 20% over the next three years to 2022, I would certainly consider purchasing shares in Flight Centre below $42.50.
This valuation is based upon Flight Centre achieving their 2022 financial year targets outlined in their 2018 Annual Report.
These targets are significant as they form the performance hurdles linked with remuneration of the board – in the form of shares in Flight Centre.
2022 Targets
These 2022 targets include a Profit Before Tax (PBT) margin of 2% and a 7% annual growth in Total Transaction Value (TTV).
Flight Centre says, “TTV represents the price at which travel products and services have been sold across the group’s various operations, both as agent for various airlines and other service providers and as principal, plus revenue from other sources. Flight Centre’s revenue is, therefore, derived from TTV”.
Profit Before Tax margin has been defined by Flight Centre as profit before tax as a percentage of TTV.
In my view, these targets are reasonably achievable.
TTV growth of 8.5% was achieved in 2018, and the 2019 growth outlook was strengthened by Flight Centre’s announcement made in December 2018.
This release highlighted drivers of future profit growth including:
- The acquisition of U.S based Casto Travel. Flight Centre’s United States business is growing rapidly and is still only the equal second with the U.K in terms of profits generated outside Australia.
- 10 year lease agreement of the Camakila Legian Hotel in Bali. This underlies Flight Centre’s objective to grow its ‘Travel Experiences Network’ that includes tour operator, destination management and hotel management businesses.
- Further mergers or acquisitions are being considered to boost growth, productivity and customer experience.
Flight Centre advised it had made “solid progress” toward achieving a PBT of 2% at their 2018 Annual General Meeting. PBT improved 0.12% to 1.76% in the 2018 financial year on the back of slowing cost growth and improved productivity. Some loss-making businesses were closed and an investigation had commenced into achieving additional synergies within the business.
Here are my calculations:
- 2018 reported TTV of $21,826 million.
- Growing at 7% per annum, TTV would equal $28,609 million in 2022.
- Assuming profit before tax equals 2% of TTV, profit before tax will equal $572 million in 2022.
- Assuming an effective tax rate of 27.3% (effective tax rate in 2018), tax paid will equal $160 million. Net profit after tax will, therefore, equal $412 million.
Assuming shares outstanding of 102 million, EPS will equal approximately $4.08. According to Morningstar, 101.1 million shares were outstanding as at 30 June 2018. The number of shares outstanding grew by just 0.5% between 2014 and 2018. Assuming this continues, shares outstanding in 2022 may equal about 102 million.
|
|
2022 |
|
TTV ($AUD Millions) |
$28,609 |
|
Profit Before Tax ($AUD Millions) |
$572 |
|
Tax Paid ($AUD Millions) |
$156 |
|
Net Profit After Tax ($AUD Millions) |
$416 |
|
Shares outstanding (Millions) |
102 |
|
EPS ($AU) |
$4.08 |
|
Forecast share price at P/E of 18x |
$73.40 |
Please note: These forecasts are simply forecasts. Rask Media does not guarantee they will be achieved.
A price-earnings ratio (P/E) of 18 has been applied as it is the approximate midpoint between the 5 year low P/E of 10.8 and 5 years high P/E of 25.8.
Based on these calculations, in my view a reasonable 2022 price target for the Flight Centre Travel Group would be $73.
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