Could there be a long term opportunity in the struggling travel agency, Flight Centre Travel Group Ltd (ASX: FLT)?
Capital raising
Flight Centre initiated a significant $700 million capital raising at a 27.3% discount to the last close price of $9.91 on 19 March 2020. This places Flight Centre in a unique position, where it has approximately $2.3 billion of liquidity despite a market capitalisation of just over $1 billion.
Trading update and outlook
Flight Centre was in a very strong growth position prior to the coronavirus outbreak. The company was on track to deliver a record year of total transaction value (TTV) in FY20, after generating $12.4 billion TTV in 1H20 (11.2% up on the prior corresponding period) and record-breaking TTV in both January and February.
Since the global policy push to contain the virus, the Flight Centre business will largely be going into hibernation with a variety of cash flow saving initiatives expected to reduce costs by more than $1.9 billion on an annualised basis. This includes the closure of more than 50% of leisure shops, workforce reduction, media expenditure paused and elimination of all other non-essential capital expenditure.
However, post implementation, it expects that monthly cash operating costs and capital expenditure will be approximately $65 million.
Making the most of a dire situation
Flight Centre is attempting to make the most of a dire situation by adapting and continuing revenue generating operations. This includes activities such as long term leisure bookings, bookings for essential services and supporting the government with hotel isolation programs.
Foolish takeaway
Flight Centre is making the right moves by making a push for cost saving initiatives while maintaining relevant revenue generating services.
However, there is continued uncertainty as to the duration of and further impact of COVID-19 including lockdowns, travel restrictions and the impact on the Australian and global economy. There is no certainty that demand for Flight Centre's services will improve, let alone normalise to a level prior to the impact of COVID-19. If such conditions persist into 2021 and beyond, it could place Flight Centre in an even weaker capital position.
I believe that its shares are cheap, but there is too much uncertainty at this point in time to make an investment case.
