No matter which way I slice or dice it, Flight Centre Travel Group Ltd (ASX: FLT) shares look cheap.
Down 20% this week alone, Managing Director Graham 'Skroo' Turner stated publicly this morning in the Fairfax Press that the market may have "overreacted".
I agree.
That's why I bought some shares on Tuesday.
| Implied Value | Weighted | |
| EV/EBITDA | $51.43 | 20% |
| DCF – Fair | $51.84 | 35% |
| DCF – Conservative | $40.54 | 35% |
| P/E | $41.51 | 10% |
| Intrinsic Value: | $46.67 |
As can be seen in the table above, I believe fair value for Flight Centre shares lies somewhere around $46.67, using the somewhat arbitrarily weighted valuation techniques above.
For my analysis, I compared Flight Centre to similar companies like Corporate Travel Management Ltd (ASX: CTD) and Webjet Limited (ASX: WEB).
However, I actually feel I've been quite conservative with my estimates. Especially the one highlighted.
Key inputs to my "DCF Conservative" valuation include a 10% drop in revenue in 2015, and a fall in the Australian division's EBITDA (earnings before interest, tax, depreciation and amortisation) margin to a GFC-like low of 12%, between 2016 and 2022.
Source: Company reports
As can be seen from the above, my conservative valuation relies on a steep drop in the EBITDA margin from the Australian business. To put that fall in context, the United Kingdom business – Flight Centre's second most profitable – has an EBITDA margin of 19%.
Around 80% of the company's profit came from the Australian business in its 2014 financial year. However, the group's push internationally bodes well for long-term outperformance.
Despite producing profits at a lower margin, the company is building scale across North America, Europe and Asia.
Source: Company reports
Undoubtedly, there is going to be a slowdown in Flight Centre's profit – and its share price – if consumer confidence in Australia takes a dive – which I think it will.
Taking a 'worst case scenario' approach to valuing shares, however, is the only prudent way to do it.
Looking ahead, I think Flight Centre will expand into Europe, continue to post record total transaction value in North America and the United Kingdom.
With a 4.5% fully franked dividend yield, robust balance sheet – expected to house $500 million of cash at the next reporting date – and savvy management at the helm, I'm not betting against Flight Centre over the long term.
Are you?
