Why Flight Centre Travel Group Ltd shares could head higher

Credit: Jaan

Shares in online and shop front travel agency Flight Centre Travel Group Ltd (ASX: FLT) are nearly 3% higher in morning trade after the group announced the acquisition of a corporate travel agency based in The Netherlands.

Flight Centre did not disclose the amount paid for the agency named Business Travel Development, although it did state the acquisition had annual revenues of more than EUR 10.3 million in financial year 2015. Therefore the cost is likely to be small to minimal when you consider Flight Centre has around $430 million in cash on its balance sheet and minimal debt of around $21.2 million.

This kind of cash mountain being managed by an experienced founder (Graham Turner) with a long track record of success is what is one of the company’s primary attractions for growth focused investors.

The business has long been expanding overseas with established and market-leading operations in the giant UK travel market, alongside a company-owned presence in other large or fast-growing markets like the US, Canada, India and China.

Flight Centre has recently flagged that expansion into continental Europe is on the agenda by using its established UK operations as a springboard, while expansion into mainland China has also been flagged as another primary objective. Unsurprisingly either, with China’s fast-growing outbound travel market of flights and organised tours a potential cash mega-cow for a global operator like Flight Centre.

Others looking to harness the Chinese travel tailwinds include Corporate Travel Management Ltd (ASX: CTD), which has a joint venture with Chinese outbound travel company World99.

Flight Centre recently posted an impressive interim profit result with total transaction value of $9.2 billion for the half-year, up 12.8% over the prior corresponding period, with all 10 countries or operating regions posting record results.

Interim revenue and profit were also up by double-digit amounts, with the stock trading on around 19x estimated annualised earnings of $2.32 per share.

The full year fully franked yield is also likely to be in the region of 3.7%, with Flight Centre having a consistent track record of gradually increasing its dividend payouts.

The business recently guided that it expects to achieve full year underlying net profit between $380 million to $395 million, which would represent growth of 4%-8% over the prior full year.

Given the travel tailwinds, balance sheet strength, global operations and founder-led nature of this business it is likely to remain a sound long-term performer in my opinion.

One potential fly in the travel ointment is the gradual decline of the company’s red-fronted bricks and mortar stores. However, the company should have sufficient scale and management sufficient foresight to successfully navigate its transition into the digital future.

BRAND NEW! Our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool contributor Tom Richardson owns shares of Corporate Travel Management Limited.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.