The S&P/ASX 200 Index (ASX: XJO) stock Flight Centre Travel Group Ltd (ASX: FLT) has gone through rough times in the last few weeks. In the past month, the Flight Centre share price has dropped by close to 20%.
Big declines aren't exactly what shareholders want to see, but it can open up a new buying opportunity for investors wanting to buy (more).
The last few years have been very volatile for ASX travel shares due to the impacts of the COVID-19 pandemic. The recent decline has brought the Flight Centre share price back to December 2020 levels.
Fund manager L1 Capital has named Flight Centre as a turnaround opportunity for a few different reasons.
Why did the ASX travel share drop?
L1 recently noted in its monthly update that the Flight Centre share price fell 29% in October because the business provided a softer FY25 first quarter update, which noted impacts from airfare price deflation and downtrading in some corporate accounts.
In that update, the ASX 200 stock reported that it was trading "marginally" above the FY24 first quarter across most key metrics, including total transaction value, profit margin and underlying profit.
However, the ASX travel share said the global corporate travel sector activity was flat in the first quarter and that growth was impacted by airfare deflation and downtrading, but there were "positive early signs for October".
Flight Centre warned that airfare price deflation is having a short-term impact on total transaction value (TTV) growth. Solid volume growth during the first quarter was offset largely by the deflation.
In the subsequent AGM trading update, Flight Centre said its quarterly TTV in the first quarter of FY25 was reasonably flat at around $6 billion, but with strong ticket volume growth of 15%, offset by the airfare deflation. It also saw a 2% underlying increase in its profit before tax (PBT) to $65.5 million, with the underlying PBT margin in line with the prior corresponding period at 1.1%.
But, Flight Centre saw a rebound in October, with TTV up 6% and underlying PBT up around 30%. For the corporate segment in October, it saw record monthly TTV and revenue globally, with its best results in Australia since FY19.
What does the fund manager like about Flight Centre shares?
L1 cautioned there may be near-term volatility for the ASX 200 stock driven by moderating travel activity, but the investment team believe the business is "much more efficient and productive" than it was compared to its pre-COVID position.
The fund manager noted that on the leisure side, more than half of the legacy retail store network has been closed, and the remaining footprint has been optimised to generate better returns. L1 also likes that the company has shifted its sales mix towards more luxury travel and independent store networks.
On the corporate side, the investment team noted that the segment "continues to grow strongly and is now the third largest corporate travel manager globally".
Flight Centre is looking to become more profitable than it was in previous years, with a 2% underlying PBT margin target over the medium term. If achieved, this would lead to a 50% increase in PBT terms from 2024 levels, according to L1.
The fund manager concluded its thoughts on the ASX 200 stock with the following:
Trading on only ~13x FY25 consensus earnings, with a strong balance sheet position, we believe Flight Centre remains an attractive opportunity and have used the sell-off to add to our position.
