Investors have welcomed Flight Centre’s (FLT) expansion into the global luxury travel market, sending shares 8% higher on Wednesday and within sight of Morningstar’s upgraded valuation of $19 per share.

Flight Centre

The travel agent was placed in a trading halt on Tuesday as it announced a $211 million acquisition of UK-based luxury holiday packages provider Scott Dunn.

But in the face of slowing economic growth and a possible global recession, has Flight Centre overpaid?

Morningstar director or equity research Brian Han says the takeover may be viewed as countercyclical, but the purchase doesn’t derail the positive investment thesis on Flight Centre at current prices.

“First, we calculate the purchase to add circa 5% to the group's maintainable EPS [earnings per share],” Hans says. “Second, the acquisition does not compromise the balance sheet.”

He says the company’s 2023 earnings guidance of $250 million to $280 million – up from a $183 million loss the previous year – suggests economic concerns are yet to affect the continuing earnings recovery and the release of pent-up travel demand.

“That pent-up demand is especially strong among travellers affluent enough to use Scott Dunn's services,” Hans says, noting Scott Dunn's EBITDA has more than doubled from pre-COVID-19 levels.

And while a severe recession could test the resilience of this well-heeled customer base, Hans says it’s a niche market that deserves more prominence in Flight Centre's portfolio.

Following Wednesday’s price surge, no-moat Flight Centre is trading at a near-10% discount to Morningstar’s revised fair value estimate.

Travel outlook remains bright


The acquisition highlights the industry’s revival from its pandemic lows.

In the past six months, Qantas’ (QAN) share price has surged 40% as pent-up demand fills planes and drives ticket prices higher. Bain Capital is also seeking advice on a potential relisting of Virgin Australia, following its return to profit in the six months to December.

But there’s still room for improvement in the domestic market, according to AMP senior economist Diana Mousina.

She notes that Australian inbound short-term arrivals, that is, those coming for less than a year, are still around 40% below pre-Covid levels.

“International tourist arrivals are still well below pre pandemic levels in Australia, which means that there is significant room for tourism to increase in 2023,” Ms Mousina says.

“It has taken time for travel into Australia to recover because of extensive Australian international border closures compared to the rest of the world, high inflation lifting airfare and travel costs and ongoing health concerns and logistic challenges related to Covid, like testing requirements.”

She says the re-opening of China’s economy will provide a “decent boost” to overseas arrivals, although it will be months before travel between China and Australia return to normal levels due to airline capacity and health concerns around travelling.

“The recovering tourism sector in Australia will be a positive growth driver in 2023 and help to offset other weak parts of the economy, including slowing consumer spending and negative growth in residential construction,” Ms Mousina says.

It comes as retail sales fell a sharper-than-expected 3.9% in December, according to the Australian Bureau of Stastics.

ANZ economists say a diversion of spending money to travel was partially behind the fall, along with November Black Friday sales prompting consumers to bring forward their retail spending. However, it also suggests households are starting to cut back on discretionary spending as higher interest rates bite.

“The decline in retail sales in December 2022 was larger than December 2020 (-3.3% m/m) and December 2021 (-3.7% m/m),” ANZ senior economist Adelaide Timbrell says.

“This is despite significantly stronger November retail sales in 2020 and 2021 of above 6% m/m, versus +1.7% m/m in 2022.”

ANZ expects consumption growth to slow through 2023 due to higher interest rates and declining real wages, as a result of very strong inflation.