Bell Potter believes that there could be a "step change" for travel demand in a post-COVID world. Furthermore, it retains the Flight Centre Travel Group Ltd (ASX: FLT) share price as its top pick in the travel sector. Its research report on 30 March retained a buy recommendation with a 12-month target price of $21.50.
A recovery in the global travel industry remains in its early days. In particular, the recovery is dependent on a successful roll-out of the COVID-19 vaccination in key markets.
Corporate business to drive earnings recovery
The report is upbeat about Flight Centre's corporate segment. In particular, the commentary also highlights that it "maintains a compelling customer value proposition driven by its global network, personalised service offering and technology suite".
According to the report, this value proposition has underpinned the company's long history of strong organic growth. Additionally, its total transaction value (TTV) is growing at a compound annual growth rate (CAGR) of ~15% since FY11.
The broker acknowledges that the corporate travel market is likely to face medium-term structural headwinds. However, the broker believes that its historic growth record and value proposition will "more than offset these headwinds and underwrite a strong recovery".
Leisure could swing the Flight Centre share price
Bell Potter approaches the leisure segment with a cautionary tone, acknowledging potential execution risk. Its report highlights the leisure segment generating 58% of TTV in FY19. However, this is only translated to a disproportionate 32% of pre-tax profit. This was driven by the bricks and mortar nature of the leisure business. This carries a high fixed cost-base and increasing competition.
The report hones in on two key issues. These issues could allow the leisure segment to drive the Flight Centre share price. Firstly, the company's ability to maintain market share and generate volume, and secondly, the sustainability of its cost-out program.
There is near-term uncertainty for both business and global travel. However, Bell Potter expects a strong earnings recovery to be underpinned by higher margins. The Flight Centre share price is currently 3.80% higher to $18.30 at the time of writing. This means the $21.50 target price would represent an upside of 17.75%.
