No matter which way I slice or dice it, Flight Centre Travel Group Ltd (ASX: FLT) shares look cheap.
Down 20% this week alone, Managing Director Graham ‘Skroo’ Turner stated publicly this morning in the Fairfax Press that the market may have “overreacted”.
That’s why I bought some shares on Tuesday.
|DCF – Fair||$51.84||35%|
|DCF – Conservative||$40.54||35%|
As can be seen in the table above, I believe fair value for Flight Centre shares lies somewhere around $46.67, using the somewhat arbitrarily weighted valuation techniques above.
However, I actually feel I’ve been quite conservative with my estimates. Especially the one highlighted.
Key inputs to my “DCF Conservative” valuation include a 10% drop in revenue in 2015, and a fall in the Australian division’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin to a GFC-like low of 12%, between 2016 and 2022.
Source: Company reports
As can be seen from the above, my conservative valuation relies on a steep drop in the EBITDA margin from the Australian business. To put that fall in context, the United Kingdom business – Flight Centre’s second most profitable – has an EBITDA margin of 19%.
Around 80% of the company’s profit came from the Australian business in its 2014 financial year. However, the group’s push internationally bodes well for long-term outperformance.
Despite producing profits at a lower margin, the company is building scale across North America, Europe and Asia.
Source: Company reports
Undoubtedly, there is going to be a slowdown in Flight Centre’s profit – and its share price – if consumer confidence in Australia takes a dive – which I think it will.
Taking a ‘worst case scenario’ approach to valuing shares, however, is the only prudent way to do it.
Looking ahead, I think Flight Centre will expand into Europe, continue to post record total transaction value in North America and the United Kingdom.
With a 4.5% fully franked dividend yield, robust balance sheet – expected to house $500 million of cash at the next reporting date – and savvy management at the helm, I’m not betting against Flight Centre over the long term.
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Motley Fool contributor Owen Raskiewicz owns shares of Flight Centre.
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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