ASX Code: FLT
Security price: $34
Forecast distribution: $1.55 per share fully franked
Flight Centre Travel Group shares crashed late last month after the company announced a modest profit downgrade. The downgrade sparked fears the travel retailer’s business model was finally being disrupted.
But this will remain a strong resilient brand and the slump was an overreaction. Flight Centre shares are now trading well below valuation and offer a healthy dividend yield, which is providing an opportunity for income-focused investors.
Graham Turner’s Flight Centre has been one of Australia’s great entrepreneurial success stories. The company started in 1981 and has grown to 2500 travel outlets in 11 countries.
That expansion has delivered strong shareholder returns and growth. Despite significant disruption to the travel industry, including the GFC, terrorist attacks and health scares, and the advent of online travel services, Flight Centre has proved extremely resilient. Its NROE (normalised return on equity) over the past ten years has averaged an excellent 26 per cent.
But investors are nervous about the impact of the internet. So when Flight Centre on June 23 announced a downgrade of full-year profits to between $355 million and $365m, down from its previous forecast range of $360m-$390m, investors dumped the stock.
The downgrade largely reflected slow growth in the competitive domestic market, which forced Flight Centre to discount. Australian consumer confidence is still cautious and corporate travel has been hit by the mining downturn. But is Flight Centre’s model broken?
I don’t think that digital disruption will cripple it. The travel market will continue to grow, and the company has a solid position in that sector.
Flight Centre’s resilience is also underpinned by its strong cash flow and balance sheet. It is forecast to pay a full-year dividend of $1.55 per share fully franked, which gives a yield of 4.5 per cent; that payout is forecast to rise to $1.62 per share in 2016, a healthy 4.7 per cent yield.
At $34, Flight Centre is trading below our forecast intrinsic value of $39.07. Despite the doubts over its business model, we think Flight Centre will be a much larger business in five-years’ time, and its healthy dividend yield now makes it a good option for income investors.