Flight Centre: Interim result 2018

Flight Centre's like the little girl in the Longfellow poem: ‘When she was good she was very, very good, but when she was bad she was horrid'.

At the moment Flight Centre's very, very good. Strong trading in November and December, combined with the cost cuts management is implementing – and a lower tax rate – drove interim net profit up 37% to $102m. That the previous half was a tough one helped.

The simple truth is that pretty much everything headed in the right direction in the 2018 interim result. There was very little to dislike, which is why the stock jumped 10% yesterday.

Management set some ostensibly aggressive targets at the time of the 2017 final result, but exceeded them with ease. It forecast growth in total transaction value (TTV) exceeding 7% annually out to 2020 but delivered 9% this half. It also said it would limit cost growth to $100m in 2018, and costs grew by just $33m this period.

The corporate business is, well, flying. Flight Centre reports its results by geography rather than business, but did reveal that corporate TTV rose 19% to $3.8bn in the half. Flight Centre's corporate business is not only 60% larger than competitor – and market darling – Corporate Travel Management, it's growing almost as fast. Management claimed Flight Centre corporate was winning market share and the numbers back it up.

Record profits

The international business is also doing much better, and now contributes almost 50% of TTV. The US, UK and Canadian businesses all produced record profits in the seasonally weak first half, with the entire international division generating about 27% of group profit. Management's flagged restructure should help finally realise what we hoped for in Flight Centre's ongoing evolution: an increasing proportion of profit coming from international operations.

If we had to find fault it would be with the Australian leisure travel business, which remains Flight Centre's largest. Leisure TTV grew just 1% so it's pretty mature and is likely to suffer continuing incursions from online competitors.

More broadly, the Australia and New Zealand segment, which includes corporate, grew TTV by 4%. But productivity increased substantially, with TTV per consultant up 8%. It was a pretty decent performance given the half was disrupted by 7,000 consultants needing to be trained in Sabre, the company's new travel distribution system.

With the first half proving stronger than expected, Flight Centre has upgraded its guidance for the second half. After producing a first-half profit before tax up 23% to $139m, management now forecasts $360m to $385m for the full year. The second half is seasonally much stronger, but management's new guidance could prove conservative.

That's fine by us because, as we saw a year ago, things change quickly in the travel industry.

Plain sailing?

One flagged change we're not completely convinced by is management's decision to rationalise the number of brands in Australia. Previously it operated stores under Flight Centre, premium brand Travel Associates, Escape Travel and Cruiseabout.

Escape Travel and Cruiseabout will be folded into Flight Centre and Travel Associates, so there may be some disruption as staff move about. While brand rationalisation will produce marketing efficiencies, whether customers view Flight Centre as the appropriate destination for cruises remains to be seen (although the one-stop shop approach seems to work for Webjet).

In the end, though, Flight Centre's management team has made relatively few mistakes over the past two decades. Travel retailing might be cyclical but, with Flight Centre, the best in the business are working for you. The 2018 interim results are an example of how, when it's good, it can be very, very good.

It's occasionally horrid, of course, with the global financial crisis proving a difficult time for the business. Flight Centre can suffer during economic downturns or other negative events, which is why we're sticking fast to our Buy price of $35.

The stock has now risen almost 80% since we last upgraded it at around $31 in Flight Centre's ticket to ride. It's a textbook example of buying when a company is out of favour after a series of profit downgrades.

With the corporate business continuing to impress, we're lifting our Sell price to $60. However, if you followed our 3% initial portfolio weighting, you might now be approaching the 6% limit. The stock is a long way from being underpriced and, if you'd be concerned by a significant price fall, we strongly suggest you take profits. Otherwise, HOLD.

Note: The Intelligent Investor Equity Growth and Equity Income portfolios own shares in Flight Centre. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.