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Flight Centre flags third straight earnings fall for FY19

Glenn Freeman  |  29 Apr 2019Text size  Decrease  Increase  |  
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Weak sales in Australia and New Zealand operations have forced the travel agent to slash FY2019 guidance and prompt a 40 per cent reduction in Morningstar's second-half EBIT outlook.

Flight Centre on Friday slashed its underlying profit before tax guidance by 14 per cent to between $335 million and $360 million, an announcement that shocked Morningstar senior equity analyst Brian Han.

Han says the travel and leisure operator's Australian and New Zealand business had already been expected to post the company’s third consecutive period of material earnings decline, "but the severity has caught even us by surprise."

In response, Han has cut his group profit before tax estimate of 11 per cent to $355 million, and he expects second-half EBIT will drop to $86 million – 40 per cent below the same period in 2018, and below Morningstar's prior forecast of a 23 per cent drop.

Flight Centre

Weakness in Flight Centre's dominant ANZ segment prompted the FY19 earnings downgrade

Flight Centre's leisure segment, which comprises more than 70 per cent of the group's transactions in Australia and New Zealand, was the key contributor to the profit warning.

“While we expect Australian leisure results to improve as short-term operational improvement plans gain traction and as longer-term transformational strategies are implemented, we also expect these trends to continue," Flight Centre managing director Graham Turner said on Friday.

“We have started to see some modest signs of recovery in Australia recently, with margins stabilising and customer enquiry growing steadily, but this has not yet converted to increased bookings, which is a trend that has been evident in the past when consumer confidence has been relatively low.”

But Han says growth in the overseas and corporate travel segments of Flight Centre's business were insufficient to offset weakness in the ANZ operations.

A compound annual growth rate of minus 6 per cent in ANZ compared with just 3 per cent in the corporate travel driven overseas markets.

Han cites the structural risks facing the group as the main reason for his "muted" five-year earnings compound annual growth rate of minus 2 per cent.

He notes that some of the causes for the downturn may be temporary, such as investment in staff, new wage deals, and impact of disruptions from restructuring activities.

But Han also points to structural challenges including Flight Centre's reliance on brick-and-mortar shopfronts, along with technology improvements, which mean consumers increasingly book flights and holidays themselves instead of using a travel agent.

Han says the weaker near-term outlook for ANZ is reflected in Morningstar's consistent belief that Flight Centre is overvalued. His $36.50 fair value estimate - which has not been shifted on the back of the latest announcement – is 6 per cent below Flight Centre's Monday opening price of $38.79.

Flight Centre shares were trading at $44.17 on Wednesday, before the market closed for Anzac Day, dropping to around $39.40 after the announcement on Friday.

is senior editor for Morningstar Australia

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