Investment bank JP Morgan reckons that travel retailer Flight Centre will meet its reduced profit forecasts but believes there may be further downside in store for Australia’s leading travel company and sees online Webjet as the better investment, for now at least.
Flight Centre shares are the cheapest they’ve been in a long time, falling more than 30% in the past 12 months, and are now trading in the early $30s.
Yet analyst Quinn Pierson is uncertain they have hit bottom.
He expects Flight Centre to report of pre-tax profit of A$355.9m for the 2015/16 financial year – a 2.8% decrease (underlying) over the previous year.
“Whilst TTV growth should remain robust, both income and EBITDA margins are expected to contract, driving the earnings decline,” he wrote in a client briefing note.
“We retain our Neutral recommendation, but suggest risk to our forecasts and the timing of recovery is arguably skewed to the downside.”
Other investors, however, believe that Flight Centre is worth the risk and represents a good buying opportunity.
Sean O’Neill from Motley Fool is one of those and cites three main reasons: it’s relatively cheap, has loads of cash, $431m, and minimal debt.
It’s also been bullishly investing in new businesses and technology, the results of which have yet to be seen.
Meanwhile, Flight Centre has maintained its aggressive marketing habits – just as it did during the GFC, a move that paid long-term dividends for the business, increasing market share at the expense of other retailers.
As for Webjet, JP Morgan is expecting a full-year pre-tax profit of A$35m, up 12% over the previous corresponding period with strong growth from both its consumer and B2B platforms.
In the domestic travel market JP Morgan believes Webjet will take share from its competitors in a flat market.
“We retain our Overweight recommendation given continued strong TTV growth and robust earnings outlook despite the high multiple.”