The travel stock flying into unknown territory

When you think about the ways the world changed through COVID-19, travel - or the lack thereof - springs to mind. It decimated the industry, to put it mildly. 

Today's results from Flight Centre show the ongoing impact of that. It booked a loss of $287.2 million for the year ended June 30 from the previous year’s $433.5 million shortfall. 

"After two years of unprecedented disruption to normal global travel patterns and other everyday activities, we are pleased to start [this year] with a considerably brighter outlook,” CEO Graham Turner said.

“Travel demand has recovered rapidly since most governments globally removed or relaxed border restrictions, and we have started the new fiscal year with strong momentum.”

For Roger Montgomery of Montgomery Investment Management, whether FLT takes off or remains grounded over the coming months will hinge, not surprisingly, on the economic outlook. 

The world is opening up, yet "positive trading sentiment towards the travel stocks could be overrun by negative sentiment towards the economy and interest rates."

In this wire, Montgomery shares some of the highlights from the result and gives us his take on the outlook for the travel sector over the year ahead. He also pits Flight Centre against the other main flight stock - Corporate Travel (ASX: CTD). What's not to love? 

FLIGHT CENTRE (ASX: FLT) KEY RESULTS:

• Revenue of $1 billion (+154%)
  
• Underlying EBITDA loss of $183.1 million (+46%)
  
• Pre-tax profit of -378 million (+29%)
  
• Net profit of -287.2 million (-34%)
  
• Operating cash flow is positive since travel restrictions removed
• No dividend

Note: This interview took place on Thursday, August 25, 2022. Montgomery Investment Management does not currently hold Flight Centre but does hold Corporate Travel.

What were the key takeaways from this result? What surprised you the most?

It was slightly better than consensus at the EBITDA level, and they produced a reasonable profit in Q4. Most importantly, operating cash flows turned positive in March, so the company now has $1.3 billion in cash and investments.

That strong cash flow means they have good liquidity and a strong balance sheet. The other takeaway was that the corporate business is actually performing really strongly. And they're gaining market share.  

Would you buy, hold or sell FLT on the back of these results?

Rating: HOLD

If you believe the macro picture is deteriorating, then there might be an opportunity to buy it cheaper. 

Investors need to understand that because of the capital raising, it's going to be many, many years before the share price goes back to what it was prior to the pandemic. But if you believe that we're going to see steady pickups in international travel, then you may not see the lows again.

So right now it's a hold, but I'm biased toward buying it on weakness.  

What’s your outlook on FLT and its sector over FY23?

We think the travel sector is going to continue to improve, but positive trading sentiment towards the travel stocks could be overrun by negative sentiment towards the economy and interest rates. 

Fragility sums it up. 

Are there any risks to this company and its sector that investors should be aware of given the current market environment?

The only risk is the stock getting ahead of itself and investors being sucked in by positive momentum. It's important to be disciplined around value. 

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?

Rating: 3

Probably a three. Middle ground. If the Federal Reserve's intention to reduce its balance sheet by another $1.5 trillion comes to pass, then we could see a resumed decline in the stock market. 

How does the stock compare to Corporate Travel?

CTD's FY22 numbers were a 5% miss versus market expectations, and their guidance looks softer. Both FLT and CTD have softer guidance with respect to revenue and EBITDA, so it's important to show that they're similar in terms of their outlooks. 

EBITDA for CTD came under at just under $60 million, versus just under $61.5 for consensus. And their NPAT was also weaker. The market had $18.6 million and CTD's came in at $17.5 million. 

Assuming a full recovery, in FY24 CTD is targeting $810 million in revenue, but the market prior to the result had about $902 million. And EBITDA for FY24, CTD said it would be $265 million and the market thought it would be $272 million. So in both cases, that's a bit of a miss.  

CTD in North America and Europe also have strong forward bookings, and they expect domestic to be quite resilient. 

It's very hard to distinguish between FLT and CTD because both of them will trade based on expectations of a full recovery in travel. 

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