Flight Centre

Flight Centre recently updated its profit guidance for the financial year just ended, with an expected profit before tax of $285m-$290m. That’s the upper end of the $270m-$290m range most recently reaffirmed on 5 Jun 12 (Hold – $17.50) and up 16-18% on last year’s result. We estimate underlying earnings per share for 2011/12 will have just eclipsed $2.00.

The press release headline—‘Strong UK and US results help drive Flight Centre to record profit’—and body seemed crafted to allay concerns about the company’s reliance on a buoyant Australian outbound tourism market, concerns we’ve voiced on numerous occasions in this publication. More details will emerge with the full result announcement on 28 August, but Australia again provided the bulk of profit growth (we’d guess about 2/3rds of the $45m increase) and management’s argument isn’t wholly convincing. Still, it was good to see higher profit from UK and US operations, and we’re certainly not averse to making hay in Australia while the sun shines. It’s also good to see that corporate travel generated more than $4bn in total transaction value globally (approximately 30% of the company total). But an Australian downturn remains the chief risk, and a likely explanation for the low price earnings ratio (PER) of 10 granted by the market.

Management plans to add 1,000 new sales consultants over the next year (an 8-10% increase in sales force) and also highlighted a new and long overdue development. Last year, we speculated about a shift towards full online transaction capability in Flight Centre: Shops v Internet of 14 Nov 11 (Hold – $19.72) and that is now a reality, with once hamstrung Australian customers finally able to search and book international flights online. Full online booking capability is not a panacea to Flight Centre’s threats but it is, we believe, a prerequisite to long-term success. With the stock up 17% since 5 Jun 12 (Hold – $17.50), it’s moved further away from the price where we’d be interested in upgrading (see recommendation guide). The stock isn’t expensive but it’s not cheap enough for us yet. HOLD.