Morgan Stanley changes its position after Flight centre raises $700 million and closes 799 stores.

The Tourism industry was surging before COVID-19. However, the virus is causing our treasured travel stocks to fall off the cliff. Just by looking at Qantas (ASX: QAN), Virgin (ASX: VAH), Royal Caribbean Cruises (NYSE: RCL) and Carnival Corp (NYSE: CCL), the industry-wide impacts become clear. The above companies are slashing employees in record numbers, experiencing significant slumps in profit, and are begging for government bailouts. Just imagine how new restrictions worldwide would amplify the already concerning consequences above. The current fallout of airline companies is causing many travel agencies to become infected by the virus. Today we are discussing whether Flight Centre (ASX: FLT) and Webjet (ASX: WEB) are viable long term investments?

Can Flight Centre recover and emerge stronger?

Flight Centre’s share price is nosediving, currently trading at an 80% discount of $10.60.

COVID-19 is causing the travel agent to suffer significant earnings losses, devise drastic liquidity strategies, and even request government funding.

So what is FLT’s plan for the coronavirus?

Flight Centre is implementing a plethora of cost-saving and liquidity initiatives to ensure survival throughout the pandemic. These include

  • Flight centre reducing monthly operational costs from $227 million to $65 million by July 2020
  • Reducing global stores from 593 to 222
  • Australian Flight centre stores decreasing from 944 to 516
  • Possibly selling their Melbourne Head Office
  • Increased debt facilities by $200 million
  • $700 million capital raising on Monday
  • Cancelling April’s $40.1 million interim dividend
  • Flight Centre will incur $210 million in one-off costs (Withdrawal from leases and redundancies) to implement these initiatives

Cost-savings are essential in ensuring a flexible balance sheet throughout the virus. However, the real question is, can Flight Centre’s earnings recover?

Analysts on Flight Centre

Morgan Stanley changed its rating from a hold to an ADD, with a price target of $13.00. The broker estimates, excluding government support, that Flight Centre has an 18-month liquidity buffer. Also, Morgan expects FLT to suffer huge earnings losses throughout FY20 and FY21 but forecasts a recovery during FY22-FY23.

UBS, like Morgan, is backing the Travel agent giant and believes FLT will only enter recovery in 2023. Upon analysis, UBS claims Flight Centre is in a position to cover cash costs for the coming 11 months. Moreover, FLT’s ability to operate throughout the virus reassures UBS that the company will transcend from COVID-19 with more market share.

Like UBS, CITI is also rallying behind the Travel agent mammoth. Citi forecasts Flight Centre’s transaction value to be down -22% in FY22. However, claims that recovery for FLT is probable as the market stabilises and the demand for air travel returns to normal post-coronavirus.

Moreover, Consensus and Morningstar are rallying behind FLT for long-term recovery.

Flight Centre’s History

Furthermore, Flight Centre is a 38-year-old veteran. Meaning management navigated FLT through the unkind waters of the 1987 crash, the GFC and the SARS outbreak. COVID-19 is the most challenging event FLT have encountered in over 30 years of business. However, Flight centre is “well-positioned to weather a prolonged recovery and take advantage of the significant opportunities that will arise once conditions normalise” (MD Graham Turner).

Also, the virus will inevitably cause smaller and less experienced travel agents to close. Meaning, in the foreseeable future Flight Centre should experience anĀ  increase in market share.

I firmly believe that Flight Centre is an excellent stock for patient investors. However, I would wait until the COVID-19 storm clears, travel restrictions loosen, and the capacity on airplanes return to a reasonable level. Your own research is required as this is my opinion.

Hang on, what about Webjet?

WEB was arguably, one of the best performing travel agents pre-COVID-19. However, the virus wrenched WEB back down to its 2015 price of $2.80.

Webjet raised $231 million in equity on the 2nd of April. In turn, WEB looks well-positioned to come out on the other side of the tunnel.

If Australia contains the virus, then the investor confidence behind Webjet might re-awaken. However, Webjet, like Flight Centre, is forecasted not to recover until FY22-23.

Overall, based on my research, FLT is a more attractive investment. Essentially, Flight centre is the Qantas, whereas Webjet is the Virgin equivalent in the travel agent industry.

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Patrick McLoughlin, Senior Manager of YIG.

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