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I just bought Flight Centre Travel Group Ltd shares: Here’s why

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”.

I agree.

That’s why I bought some shares on Tuesday.

Implied Value Weighted
EV/EBITDA $51.43 20%
DCF – Fair $51.84 35%
DCF – Conservative $40.54 35%
P/E $41.51 10%
Intrinsic Value:   $46.67

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.

For my analysis, I compared Flight Centre to similar companies like Corporate Travel Management Ltd (ASX: CTD) and Webjet Limited (ASX: WEB).

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.


FLT Revenue and EBITDA

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.


Store Count and Revenue

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.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

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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