Travel business Flight Centre Travel Group Ltd (ASX: FLT) this morning posted an underlying net profit of $363.7 million on revenues of $2.4 billion for the full year ending June 30, 2015. The underlying profit was 3.4% down on the prior year, while revenues climbed 6.8%.
Net margins fell 28 basis points as Flight Centre was forced to issue two profit warnings over the past year as Australian holidaymakers tightened their belts after years of solid economic growth. Another important factor affecting margins is the growth of Flight Centre's corporate travel operations, which generally have lower margins than the leisure sector.
The board maintained dividends at the same level as the prior year with total dividends paid of 152 cents per share on earnings per share of 254.7 cents. This represents a payout ratio around 60% and Flight Centre retains around $560 million in cash sitting on its balance sheet.
Therefore a share buyback seems to remain a possibility, although for now it appears that boss Graham Turner has other ideas on how best to pilot the business.
Perhaps he is keeping his powder dry for further acquisitions to support the shift into the online space with digital operators like Webjet Limited (ASX: WEB) only valued at around $309 million. Recently US travel giant and Flight Centre rival Expedia Inc snapped up local online travel aggregator Wotif.com for around $700 million.
Global game
Although Australia posted a disappointing result it was compared to a strong 2014 financial year and Flight Centre's growth prospects are increasingly leveraged to its international operations.
The UK and US are its other major markets, with the bright red shop fronts and grinning pilots now adorning some of the most popular real estate the world over.
However, the plunging dollar also remains an issue with regard to outbound travel from Australia that may only feed through into this financial year's results. This is because it's now hitting lows last seen around seven years ago versus the UK pound and US dollar. Flight Centre is on the record as suggesting currency swings do not impact holidaymakers' travel plans much, although given the recent big falls in the dollar this looks a metric to watch.
The business is also moving into the large and fast-growing markets like China, Singapore, India, Mexico and South Africa. Clearly global travel in emerging markets is likely to see an upswing over the long term and I would not bet against Flight Centre's growth ambitions in these regions.
Outlook
It's not hard to make the bull case for Flight Centre, but then again it's not hard to make the bear case either and the role of its bricks-and-mortar stores in the digital future remains a potential thorn in its side. However, the shift to the hyper store format looks prescient and mirrors the moves of other retailers like JB Hi Fi Limited (ASX: JBH) and Dick Smith Holdings Ltd (ASX: DSH).
Despite the physical store format Flight Centre is also a digital business and given the travel tailwinds, valuation, balance sheet strength and international growth potential I think it's a moderately high-risk buy at current prices.
The stock has soared 15% to $37.14 in morning trade as the market applauds guidance for profit growth in the region of 4%-8% for the year ahead. If it performs the share price is likely to see strength from here with a nice outlook.
