Flying high

Two big-name online travel companies have produced splendid results this season … and a microcap is bubbling under.

PORTFOLIO POINT: Webjet and Flight Centre have achieved strong results, using their free cash flow to pay down debt. Corporate Travel Management is another to watch.

One of the big themes that emerged clearly for me during the 2012 reporting season was the stellar results in the travel sector.

Both Webjet (WEB) and Flight Centres (FLT)  produced results that contrasted markedly with the poor returns being produced elsewhere and the generally downbeat economic commentary (including mine) related to the impact of the fading mining boom.

Flight Centre has reported not a 5% or 10% lift in profits but a 43% jump on the back of improving performances from its UK and US operations, as well as a growing share of the local corporate travel market.

NPAT of $200.1 million was up from $139.8 million a year earlier and slightly better than analysts had expected. That was one of the reasons the market didn’t do anything irrationally exuberant with the stock price, and the other was the fact that last year’s result was impacted by $32 million of one-offs.

What many investors don’t realise is that FLT operates through 2,362 stores in 10 countries including Australia, the UK, US, Dubai, Singapore and China. Many investors still believe that Flight Centre is just that local travel agency in their neighbourhood shopping strip.

Many of the international regional operations posted record results and the company made the observation that “both our retail and corporate travel businesses are now among the largest businesses of their kind in the world, which means we do not rely solely on one travel sector”.

Earnings before interest and tax in the US doubled the company’s forecast of $5 million, and in the UK EBIT rose 53%. Since 2002, profits have grown an average 12% annually from $62 million to today’s $200 million.

The company had the benefit of $1 million of additional equity capital during the year, and yet debt fell by $61 million and cash at bank rose by $111 million. This improvement in the company’s cash position was a function of the improving cash flow performance. Cash flows from operations jumped from $154 million to $341 million, and after spending on new businesses and new sites as well as paying down debt Flight Centre was left with more than $130 million of free cash flow.

Not surprisingly the strong cash flows saw the company announce a final dividend of 71¢ per share and a payout ratio for the full year of 56%.

Earlier this month the much smaller online travel agent-like player, Webjet, reported a more than 24% lift in profit to $13.5 million. Webjet only has $1 million of property, plant and equipment to maintain compared to Flight Centre’s $143 million. Furthermore, Webjet has no borrowings, so the company elected to use its strong free cash flow to buy back $13 million of its shares, reducing issued capital from over $23 million to just $11 million.

Putting their sector to one side, both Flight Centre and Webjet produce attractive financial metrics. I have longed persuaded you to focus your attention on businesses with high rates of return on equity with little or no debt. Not every travel agency produces desirable metrics, and as one or two companies in an industry emerge as leaders they begin to leverage their competitive advantages.

Both businesses appear to be enjoying a rising tide and are certainly making hay. For all the reasons listed above, you should investigate the upside and downsides of investing in these two companies. But there is another that I reckon warrants attention, and that is Corporate Travel Management (CTD). CTD is relatively tiny, with 570 staff, 9% market share and 750 clients, but its largest shareholder is the founder and manager and I reckon the growth both FLT and WEB have enjoyed in 2012 may also travel across to this niche player.

The company has not been listed long but like its larger and better-known peers, it enjoys a strong balance sheet with little or no debt, high rates of return on equity and – notwithstanding its recent acquisition(s) in the US and Melbourne – solid free cash flows.  

That latter point may be reflected in the quantum of the 2012 half yearly dividend, which exceeded the available cash flow. Either management were advertising a very strong second half (something I believe) or they are feathering their own nest through the payment of dividends in excess of what the company can sustainably fund.

I don’t reckon it is the latter – that is why I own a few shares - but time will tell and, importantly, like travelling for the first time to an exciting destination, we won’t have to wait too long.


Roger Montgomery is an analyst at Montgomery Investment Management and author of Value.able, available exclusively at rogermontgomery.com.

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