Flight Centre Travel Group Ltd (ASX: FLT) shares have gone on an incredible run in 2023, with a rise of more than 50%, as we can see on the chart below.
It's understandable why investors are more excited about the ASX travel share than several months ago – travel demand has been strong for a long time. Flight Centre has been reaping the benefits of households (and businesses) getting back into the air.
Let's have a look at the latest commentary about the current demand levels.
Strong demand
On 20 July 2023, not long ago, the company revealed that it's expecting to report in FY23 that its total transaction value (TTV) had grown by 115% to $22 billion. This is expected to mean that the company can report underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of approximately $300 million.
That EBITDA figure would represent a $483 million turnaround on the $183 million underlying EBITDA loss reported in FY22.
In that update, the Flight Centre managing director Graham Turner said:
Looking ahead, our expectations are that leisure travellers will continue to prioritise holidays and experiences over other areas of discretionary spending, as we have seen in the past and as evidenced by the consistent year-on-year growth in outbound travel in large and important markets like Australia.
In corporate, we expect that the large volume of new business that we continue to win – both from competitors and accounts that were previously unmanaged – will offset the impact on TTV flowing from lower-than-normal client spend.
This is as good as it gets for Flight Centre shares?
Travel demand has been growing and growing for over a year. It's still strong, but there is now some commentary that some households may start to slow spending on travel after the cost-of-living difficulties in the current economic environment.
The ABC recently reported on comments from Gemma Dale, head of investor behaviour at National Australia Bank Ltd's (ASX: NAB) nabtrade, who said:
You've seen real strength in the share price of travel-related companies, because demand is so strong right now.
However, when we look at NAB's consumer confidence surveys, travel is one of the 'top five' things that consumers say they'll cut back on.
There may be some real headwinds for those guys [Qantas Airways Limited (ASX: QAN) and Flight Centre] because consumers are saying, 'I can't afford those overseas holidays from now on'.
And you'd want to look at their numbers, and particularly their outlook statements, to see whether they're looking forward to more strong growth, or whether things are really going to slow down.
We'll have to see how much of an effect a possible reduction of demand for travel has on Flight Centre shares.
Valuation
Profit is expected to keep rising for Flight Centre between FY23 to FY25, according to Commsec. At the current Flight Centre share price, that would put the ASX travel share at 17 times FY25's estimated earnings.
This could prove to be a good long-term valuation, if enough demand remains resilient. Profit is key, in my view, for deciding which way the company will go from here.
In FY24, the business is expected to resume paying dividends. It might pay a grossed-up dividend yield of 4.2%, based on the estimates.
