Valuation and Equity Research

1. 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

2. (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

3. 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 $6.43
Present 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 $2.11
SALES 2016 $2,541 1.75% 7% 1.5 70% 30% Retained Earnings $0.92
EBITDA 2016 $404 Ke 9.63% Normalized Earnings $3.03
Implied EV/SALES 0.9x Kd 5.70% NROE 24%
Implied EV/EBITDA 5.8x WACC 8.4% Income Link $1.29
Growth Link $1.67
Simmonds 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)
CostofCapital
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
WACC
Sensitivity Analysis
EBITDA%
Sensitivity Analysis
Rates
Terminal Value

4. 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.