Flight Centre Travel Group (FLT.ASX) Recommendation: Buy Time: Long Term

Target: $38 Trailing Stop Loss: 10%

Flight Centre Travel Group Limited is

engaged in travel retailing in both the

leisure and corporate travel sector

and wholesaling. The company

operates in Australia, United States,

United Kingdom, Rest of World and

other segments. The Company

operates approximately 2,500 stores.

It operates all of its core retail,

corporate and wholesale brands in

Australia.

Analysis and Valuation: Flight Centre charges a percentage of

ticket cost as commissions hence its

performance is positively correlated

to airline and hotel prices. FLT

experienced tough selling and share price draw down through April and May on the back of a trading

update. The management warned of net profit lower than previous; result of lower air ticket prices

and soft demand due to slowing world economy. Additional to these, Zika virus is affecting travel to

most popular American destinations. There is uncertainty with the Australian Federal election and

Brexit referendum that is also hampering sales to a certain extent. However, FLT continues to invest

in global expansion, marketing and website improvement.

Oil prices rebounded sharply since the lowest point in January this year; Brent oil gained almost 95%

in the last 5 months. Australian GDP accelerated to 3.2%, which is the 30 year average and

unemployement slid down to 5.7% indicating steady recovery in the domestic economy. Overall the

economy is showing optimistic signs even though the wage growth and inflation remains low. There

are two views on Flight Centre’s business, some analysts believe that the business model is

experiencing a structural down-turn, whereas we look at it as a cyclical down-turn leading the market

to oversell the stock. In a year we expect oil prices to be close to $60 as demand-supply equilibrium is

reached and global growth rates get settled stimulating usual leisure and business travels.

FLT has a strong balance sheet with $1.4 Billion in cash. EBITDA margin of 17% and NPAT of 10% is

considered healthy relative to its size and near maturity stage of business cycle. The ROE is 19% and

the additional capital returns 27% to the equity holders. EV/EBITDA of 5.5x and PE of 12x confirms the

stock the undervalued stock price. The DCF and one year forward Simmons value FLT at $38 and $40

respectively. At these valuation figures there is just a little margin of safety for further bad news from

the management. Assuming oil prices steadily recover through second half of 2016 and global

economy picks up gradually, FLT promises good returns additional to the 100% dividend yield of 6.5-

7%.

DCF assumes low and modest revenue growth rates for the coming years. CAPEX remains the focus in

the next 2 years, but in the long run it is expected to shrink as the business matures. We assume a

terminal growth rate of 1.5%. Calculated WACC came to approximately 8.4%.

Income Investor

Growth Investor

Buy Buy

(AUD in million) CAGR

2012 2013 2014 2015 (12 - 15) 2016 2017 2018 2019 2020 2021 2022 2023

Sales 1,827 1,985 2,244 2,397 9% 2,541 2,642 2,775 2,941 3,118 3,320 3,536 3,766

% growth 8.6% 13.0% 6.8% 6.0% 4.0% 5.0% 6.0% 6.0% 6.5% 6.5% 6.5%

Total Operating Expenses -1,511 -1,617 -1,879 -2,010 10% -2,137 -2,228 -2,336 -2,485 -2,650 -2,822 -3,006 -3,201

% sales 82.7% 81.4% 83.7% 83.9% 84.1% 84.3% 84.2% 84.5% 85.0% 85.0% 85.0% 85.0%

EBITDA 316 368 365 387 7% 404 415 438 456 468 498 530 565

% margin 17.3% 18.6% 16.3% 16.1% 15.9% 15.7% 15.8% 15.5% 15.0% 15.0% 15.0% 15.0%

Depreciation & Amortization: -50 -50 -54 -54 -58 -58 -61 -65 -69 -70 -74 -79

% sales 2.8% 2.5% 2.4% 2.3% 2.3% 2.2% 2.2% 2.2% 2.2% 2.1% 2.1% 2.1%

EBIT 266 319 311 333 8% 346 357 377 391 399 428 456 486

Interest Expense -31 -32 -33 -27 -26 -28 -29 -33 -34 -34 -33 -32

Profit Before Taxes 235 287 279 307 320 329 348 358 365 394 423 454

Taxes (30%) -71 -86 -84 -92 -96 -99 -105 -107 -110 -118 -127 -136

165 201 195 215 224 230 244 251 256 276 296 318

Add: Depreciation & Amortization: 50 50 54 54 58 58 61 65 69 70 74 79

Less: CAPEX -44.5 -51 -55 -72 -125.9 -88 -87 -90 -86 -80 -70 -65

Free Cash Flow 170 200 194 197 156 200 218 225 238 266 300 332

% margin 9% 10% 9% 8% 6% 8% 8% 8% 8% 8% 8% 9%

Discount Period 1 2 3 4 5 6 7 8

Discount Factor 0.92 0.85 0.78 0.72 0.67 0.61 0.57 0.52

Present value of free cash flow 144 170 171 163 159 163 170 173

Actual Forecast period

Tax 30% Particulars FLT WEB

Weighted Average Cost of Capital 8.4% 38 0.3% 0.8% 1.0% 1.3% 1.8% ROE 19% 26%

7.5% $39.06 $41.08 $42.21 $43.43 $46.19 ROIC 27% 17%

8.0% $36.26 $37.97 $38.91 $39.93 $42.20 ROA 11% 12%

Perpetuity Growth Rate 1.5% 8.5% $33.80 $35.26 $36.06 $36.91 $38.81 EBITDA Margin 17% 26%

Terminal Year FCF $332 9.0% $31.64 $32.88 $33.57 $34.29 $35.89 EBIT Margin 15% 22%

Terminal Value $4,846 9.5% $29.71 $30.79 $31.37 $31.99 $33.36 NPAT 10% 17%

Discount Period 8.0 Dividend Yield 7.0% 3%

Discount Factor 0.5 EV/EBITDA 5.5x 15x

Present Value of Terminal Value $2,533 GEARING 34% 30%

% of Enterprise Value 66% P/E (X) 12x 27x

38 5.5% 6.0% 9.0% 12.0% 15.0% Market Cap 3.14 Bn 514 Mn

1.0% $35.49 $35.72 $37.09 $38.46 $39.84 Share Price $31.06 $6.43Present value of Free Cash Flow $1,314 4.0% $35.97 $36.20 $37.59 $38.98 $40.37

Present Value of Terminal Value $2,533 7.0% $36.46 $36.69 $38.09 $39.49 $40.90

Equity Value $3,847 10.0% $36.94 $37.18 $38.60 $40.01 $41.43 Equity - 2015 (Million $) 1270

Outstanding shares 101 13.0% $37.43 $37.67 $39.10 $40.53 $41.95 Equity - 2016 (Million $) * 1365

Intrinsic Value $38.14 Outstanding Shares (Million) 100.6

EPS * $2.40

DPS * $1.48

Payout 62%

Enterprise Value $2,360 6 Rf Rm Beta We Wd Grossed Up Div $2.11SALES 2016 $2,541 1.75% 7% 1.5 70% 30% Retained Earnings $0.92EBITDA 2016 $404 Ke 9.63% Normalized Earnings $3.03Implied EV/SALES 0.9x Kd 5.70% NROE 24%Implied EV/EBITDA 5.8x WACC 8.4% Income Link $1.29

Growth Link $1.67Simmonds Multiplier 2.96

Required Return 11.50%

Intrinsic Value $40.21

Perpetuity growth %

Equity Value

Comparable Multiples - Flight Centre vs Webjet

Capital Asset Pricing Model (CAPM)

Co

st o

f C

apit

al

Forward Simmons Valuation on FLT

<-- CAPM

*Simmons: NPAT, EPS, DPS and future equity value reflects the trading update; 5% decline in profits over PY.

Implied multiples

Annual sales growth %

<-- Cost of Debt

WA

CC

Sensitivity Analysis

EBIT

DA

%

Sensitivity Analysis

Rates

Terminal Value

Glossary ROE: Return on equity

ROIC: Return on Incremental Capital

EBITDA: Earnings before interest taxes depreciation and amortization.

ROA: Return on asset

P/E: Price to earnings ratio

NPAT: Net profit after tax

EPS: Earning per share

DPS: Dividend per share

NROE: Normalized return on equity

EV: Enterprise Value

DCF: Discounted Cash Flow is a valuation method used to estimate the attractiveness of an

investment opportunity. DCF analysis uses earnings projections and discounts them to arrive

at a present value estimate, which is used to evaluate the potential for investment.

WACC: Weighted average cost of capital is the rate that a company is expected to pay on

average to all its security holders to finance its assets. It acts as a proxy for required return

on the investment and is used to discount future cash flows to present value.

Simmons Valuation: Warren Buffett leveraging off Grahams works and teachings gave us a

marvellously simple valuation method to value businesses that distributes all of their profits

in his 1981 shareholder letter. The final piece of the puzzle was Simmons model named after

its developer Richard Simmons, an Oxford MBA, who gave us the method to value the

growth part of a business.

George Beyrouthi is an authorized representative (ASIC #315 563) of FS Securities (QLD) Pty Ltd (ACN 148 991

968) AFSL #410 183. He has been authorized to provide General Advice and Dealing services in the following

classes of financial products –Securities, Derivatives and Futures products, FOREX products to Retail and

Wholesale clients.

DISCLAIMER Any trading advice contained in this communication is of a general nature only, and your personal

financial circumstances have not been considered in its preparation. Please be aware that trading in financial

markets results in both profit and loss.