Flight Centre cruises into online headwinds
Shares in travel retail outlet Flight Centre have surged almost 40 per cent since the start of 2018, but Morningstar analysts say investors should fasten their seatbelts as the threat of online turbulence looms.
Shares in travel retail outlet Flight Centre (ASX: FLT) have surged almost 40 per cent since the start of 2018, but Morningstar analysts say investors should fasten their seatbelts as the threat of online turbulence looms.
In his latest note, Morningstar analyst Brian Han has told investors that while he applauds management's efforts to diversify and ramp up online capabilities, pressures on the group's bricks and mortar store-based model are likely to intensify as consumers move online.
"Flight Centre will remain highly profitable for some time, particularly in Australia where its vast network of retail shops, scale, and brand awareness will continue to drive the group's returns. However, we are wary of longer-term structural headwinds," Han says.
"We do not believe the group's strong network of stores is sufficient to protect the company against online competitors over the next 10 years. With the threat from online competitors increasing, we believe physical stores are likely to retain less relevance."
Since its founding in the 1980s, Flight Centre has amassed a physical network of almost 3000 shops in more than 90 countries.
In the leisure portion of the business, a segment that services customers who spend money arranging their travel, such as airfares, accommodation and in-destination activities, Han foresees pressure on commissions as consumers become more comfortable dealing directly with pure-online agencies. Technology, he says, has also worked to erode the information imbalance that exists between Flight Centre and the leisure traveller.
"While Flight Centre's services will remain relevant for leisure travellers organising complex, multi-stop international trips (especially given Australia's geographical location), we are not confident that relevance will persist for the next decade," Han says.
"We believe improving sophistication and functionalities offered by suppliers and online-only competitors will arm consumers with increasing confidence to bypass intermediaries."
Similarly, in the corporate segment, which services companies and businesses that spend money arranging travel activities for their employees, Han predicts headwinds as the group fights to keep powerful customers with access to quality information in their camp, and a highly competitive industry at bay.
By customer base, Flight Centre generates 67 per cent of its total transaction value from the retail segment, and 33 per cent from the lower-margin, transaction-fee-based corporate segment.
Han has applied a high uncertainty rating to the stock due, in part, to the travel and tourism industry's reliance on the strong consumer discretionary spending and sentiment; a figure that is highly volatile and reliant on positive economic conditions.
By way of example, he points to the group's performance during financial crisis: "net profit after tax fell from $143 million in fiscal 2008 to $38 million in fiscal 2009. This inherent volatility means fair value uncertainty is high."
Shares in Flight Centre are trading around 66 per cent premium to Morningstar's $37 fair value estimate.
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Emma Rapaport is a reporter for Morningstar Australia.
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