CFA Institute Research Challenge Hosted by CFA Society Sydney Griffith University
2016 | CFA Institute Research Challenge
Flight Centre Travel Group Limited FLT: AU/ FLT.AX Recommendation
Industry: Consumer Discretionary Current $36.85
At 31/8/2016 è Market Cap è Avg Daily Volume è Free Float Target $31.93
AU$3.6B 820,640M 50.49%
100.93M Shares Potential Downside 13%
Executive Summary Key Stock Data Sep16 As per our valuation, we issue a sell recommendation for Flight Centre (herein ‘FLT’ or the 52 Week Range 45.37 - 29.38 ‘Company’). Our 12-month target price is $31.93AUD, with a projected downside of 13%. This Institutional Ownership 62.45% has been calculated using a combination of (1) The Dividend Discount Model, (2) Discounted Free Cash Flows to the Firm, and (3) several Relative Valuation techniques. ROE 18.67 Current P/E 12.93 Investment Thesis and Outline Est. International P/E 10.21 Industry volatility, lowered necessity for travel agency intermediation and little international room Est. Domestic P/E 14.08 for expansion all collectively suggest that FLT will face future struggle. Declines in financial performance of the Company in 2016 have resulted in weaker competitive positioning. We EPS 2.42 believe this is paving the way to eventual stagnation of income, and hence loss of investor returns. Est. EPS 2.69 A summary of our fundamental top-down analysis is as follows: Price/Book 2.37 • High International Competition: Many key international players already dominate worldwide 1 Price/Sales 1.21 market share. We forecast eventual online market saturation, leaving little room for global development unless FLT can steal revenue from its existing competitors. Dividend • Lowered Industry Commission Potential: Increased sales demand from price wars between Div. Yield 4.30% domestic budget airlines cannot offset lowered commission revenues. Further, demand for DPS 1.52 agency intermediation is decreasing as online platforms are making it easier for consumers to 5 year Dividend bypass the middleman, and compare the competition. 12.59% Growth • Shifts in consumer preferences: Consumer preferences have shifted and now favour localised travel due to the weak AUD/USD primary pairing. This form of travel is simple and Relative Performance does not usually require agency intermediation. Further, corresponding growth in inbound S&P/ASX200 travel does not form revenue for FLT. Ticker: AS51 • Expensive Capital Structure: FLT currently has the most expensive WACC of all peers as 2 1m 3.73 CAPEX is funded entirely through equity. As the Company is focusing on future expansion, 6m -25.46 this will reduce the profitability of such ventures. 12m -19.81 • High Expenses and Low Net Profit Margins: For the previous 3 financial years, operating expenses have grown at a higher rate than revenues, leaving low and unimproved net profit S&PASX 200 Consumer Discretionary margins. This has led to a ROA below peer average, and an ROE at a second all time low, Ticker: S5COND causing concerns for shareholders. 1m 5.76 • Low Potential for International Profits: As FLT have shifted their focus onto claiming 6m -16.68 international market share, expenses incurred do not benefit from FLT’s economies of scale within Australia. Consequently the bottom line for these segments is not as profitable as it could 12m -13.58 be if revenues were incurred domestically.
• Many investment risks are faced and inherently volatile: Operation within 14 countries Source: Bloomberg & Team Estimates naturally causes high amounts of foreign exchange and economic risk. Further, FLT’s large fixed expenses combined with commissions fluctuating due to price wars cause high operating risk.
Income Statement 2016 2017F 2018F 2019F 2020F ($'000,000) TTV 19305 20608 21879 23095 24234 Revenue 2640 2878 3058 3222 3372 EBITDA 409 456 459 473 482 EBITDA Margin 15.49% 15.86% 15.01% 14.67% 14.29% Net Income 245 272 265 265 265 Net profit Margin 9.264% 9.466% 8.683% 8.240% 7.868% Balance Sheet ($'000,000) Total Assets 3001 3285 3596 3936 4308 Total Liabilities 1655 1812 1983 2171 2376 Total Equity 1346 1473 1612 1765 1932 Ratios FCFF/Share 2.80 2.77 2.72 2.65 2.56 EPS 2.42 2.70 2.63 2.63 2.63 DPS 1.52 1.61 1.55 1.54 1.53 ROE 18.70% 19.33% 17.21% 15.72% 14.35% ROIC 18.18% 18.30% 16.36% 15.03% 13.61%
1Priceline (PCLN:US) $1,418.59, Expedia (EXPE:US) $113.13, CTrip.com (CTRP:US) $48.96 2Above, also including Webjet (WEB:AU) $9.64, HelloWorld (HLO:AU) $4.30, Corporate Travel Management (CTD:AU) $18.14
1
2016 | CFA Institute Research Challenge
Figure 2: Corporate Structure Business Description
Company Overview Founded in 1981, FLT is an Australian based travel agency headquartered in Brisbane, Queensland. The Company had its IPO in 1995, and boasts 2.64B in revenue and 3000 stores in 14 countries as of FY16. Despite their name, FLT is not limited to revenues from airline ticket sales, and actually provides a number of services within the travel industry, such as cruise lines, car hires, and hotel accommodation.
Business Structure Source: Flight Centre Travel Group Previously known as Flight Centre Limited, FLT changed their name to Flight Centre Travel Group Annual Report Limited in 2013. Majority of the Company’s revenues are derived from the travel industry, where they operate within leisure, corporate and wholesale sectors. Of the 40 brands under FLT, leisure Figure 3: Recent Acquisitions has consistently remained the strongest sector, while the corporate division has grown to 33% of revenues for FY16 under 6 dedicated brands. The Company are targeting consumers at many different stages of travel: expanding their products to include tourist activity packages (Cruise About) and currency exchange services (Travel Money).
Excluding the travel industry, in 2016 only 9.92% of total revenue was attributed to FLT’s other companies. Evidently, FLT’s business structure is hardly diversified. This is due to the fact that management are aiming to use such expansion into other areas to support FLT travel segment growth simultaneously. For example, products from Buffalo Tours are sold within FLT’s travel package bundles, and courses offered First Class Education Group include travel agency training for employees.
Though originally a brick and mortar store based company, new technology developments are forcing FLT to expand online to continue sustainable growth. The Company has shifted its business structure by investing in online booking platforms, either by developing its own websites and online brands such as Aunt Betty, or acquiring businesses who already have a foot in the door such as BYOjet and Student Universe (Figure 3).
Company Strategy Source: Bloomberg &FLT annual Report FLT is undertaking a transition from traditional travel agency to a ‘person-to-person’ travel service provider. This includes less reliance on physical stores and increased presence online. Further, the Figure 4: FLT Revenue Break- company also wants to further personalise customer experiences, by giving agents the ability to down work from home and build a selective customer base.
The Company is undertaking large geographical expansion, and does so primarily through acquisitions. Within the last two financial years FLT have acquired several profitable companies, such as StudentUniverse.com. It is expected that they will continue to capture market share through this method.
Revenue and Expenses FLT’s main source of income is on a commission basis with individual airlines. As these contracts are largely discretionary, FLT’s revenue streams can fluctuate, particularly if high competition is shrinking retail prices. These contracts include different commission streams, such as a flat dollar amount per ticket sold, a percentage, and even overrides if FLT is successful in selling all their holdings. FLT’s revenues are hence a percentage of their total transaction value (TTV); an unaudited Figure representing the total price of transactions they have undertaken as an agent.
Source: FLT Annual Report & FLT suffers from high operating costs, particularly through wage and rent expenses necessary to Bloomberg maintain their dominant brick and mortar stores. Management is making efforts to combine several
smaller stores into a few large ones to maximise efficiency. Further, as the Company is planning Figure 5: Industry Sentiment further expansion into digital platforms, this may also then cut these expenses. Survey: Factors Essential to tourism Geographical Performance FLT has operations across 14 countries, among which Australia comprises of 49% revenue. This should come as no surprise as FLT have built themselves to a bellwether status within the domestic market; with a total of 20,000 employees within Australia and 79% of the domestic industry revenue. Following Australia are both the Europe and North America segments, at 15.6% and 11.2% respectively. In FY16, South Africa hit a record first-half year result, becoming the third most profitable country by TTV to EBIT margin.
FLT’s success however, is not consistent across the board. The INDUASIA segment contains India, Singapore & Malaysia, Greater China and United Arab Emirates. FLT have had increasing issues within this area and closed losses in FY16. However in order to compensate, management have
Source: Austrade made acquisitions within the area to capture increased market share. In particular, the Company may expand into mainland China to add to their geographical diversity.
2
2016 | CFA Institute Research Challenge
Figure 6: Terrorism Incidents Industry Overview and Competitive Positioning FLT operates under the Travel and Tourism subsector of the ICB; an industry that currently has an adjusted market value of $7.05B AUD and an adjusted 5-year CAGR of 11.16%. This growth rate is dependent on macro-economic factors which highly influence the expected travel expenditure of both corporate and leisure consumers. In particular, business and consumer confidence levels, exchange rates, and discretionary income Figures all remain key drivers in the revenue potential of travel intermediaries (Figure 5). Additionally, the industry is also subject to a large amount of social and environmental challenges, such as Brexit, the Zika Virus and increased Source: Global Terrorism Database threats of terrorism (Figure 6). These effects are further described in Appendix 2. These issues pose great threats to consumer confidence levels; a crucial element to success within an industry Figure 7: YOY International that survives on discretionary spending. Travel Growth Decreases in Outbound Travel Reduce Industry Sales Currently, growth of total Australian overseas departures is below the 10 year YOY growth average (Figure 7). This slow in outbound growth can be attributed to the weak AUD, as international travel for Australian residents is obviously becoming more expensive. While this is matched with a higher amount of incoming foreign travellers who wish to reap the benefits of a cheaper exchange rate, Australian travel agencies such as FLT will not profit. This is because bookings will likely be made from a foreigner’s local travel agency, or online platforms. We expect this situation to continue and hence FLT’s revenue streams to struggle, as NAB economist predictions favour a further weakening of the AUD (Figure 8).
Emerging Budget Airlines and Increased Aeroplane Capacity Reduce Agent Commissions The previous 10 years have seen the emergence of budget airlines revolutionise the travel Source: bitre.gov.au; industry. This increased demand for cost-effective travel is being driven by shifts in consumer IBISWorld; Team Estimates preferences (Figure 9), a large driver of Australian tourism. Combined with falling international airfare prices (Figure 10) demand has increased significantly for FLT products. Figure 8: Currency Forecast ($) Yet this is not matched with corresponding profit growth, as commissions are also cut with retail price. While the decision to offer these bookings is necessary to retain market share, it is expected FLT’s profit margins will suffer considerably.
Increasing aeroplane capacity also has a similar effect. The enhanced supply of tickets is expected to act as an incentive for airlines to offer overrides within their contracts. Yet inherently with such over-supply, prices must be decreased to also increase demand. Combined with the slow down of international travel, these increased capacities are eroding commission potential. It is expected that this will adversely affect FLT, and that their profit margins will lower correspondingly.
The Need for Travel Agency Intermediation is Greatly Lowered Due To 4 Source: NAB & Bloomberg L.P Key Factors 1. Consumer Preferences Favour Simple Localised Travel: Increased consumer preference Figure 9: Passenger Count for localised travel within Australia is evident by high passenger growth to domestic destinations (Budget Vs Full Service) (Figure 11). While increases in discretionary spending would normally plant the perfect seeds for growth within the travel industry, agencies cannot derive revenue from localised travel due to it’s inherent simplicity. Consequently, this effect is expected to be disastrous for FLT revenues as excess consumer income is spent on travel that does not usually require agency intermediation.
2. Online Platforms Create Higher Competition and Increase Direct Online Supplier Sales: The online industry is highly concentrated by direct suppliers and major online agents, who collectively hold 72% of revenues (Figure 12). Many of these well established travel companies, such as airlines, hotels and other direct service providers face little difficulty in expanding online. Due to the cost-effective nature of such a platform, these businesses are rapidly increasing their direct online sales by directly marketing to consumers, cutting out the middleman (Appendix 4).
Source: QAN Annual Report Consequently there is a lowered necessity for travel agency intermediation.
Figure 10: CPI Adjusted Best Such a conclusion is supported by a study conducted by the European Journal of Tourism Discount Rate Airfare ($AUD) Research in 2015 (Appendix 4). Particularly for frequent traveller, consumers prefer booking directly online. This is due to the quick and easy nature of the platform, user desire to save intermediation costs and the ability to effortlessly compare competitors at the click of a button: increasing the risk of stolen market share.
Further, the study also concludes that online travel research has transformed into an entertainment platform for consumers, who can come home after a long day at the office and plan their dream holiday. While these persons are typically low-frequency travellers, and the study suggests that they are more likely to require intermediation, they are inherently less profitable than those who travel regularly. Hence the increased presence of direct online booking systems pose a great threat to travel agency revenues.
Source: bitre.gov.au
3
2016 | CFA Institute Research Challenge
Figure 11: Passenger Growth (%) To Leisure Destinations As this technological expansion favours the easiest methods for consumers, it is likely that agency presence online could become redundant. Companies such as Google, Facebook and travel information websites like Tripadvisor are seeing exponential growth in their travel advertising revenues. This is due to an increase in suppliers expanding their direct online marketing strategies (Appendix 5). As a result it is likely that these large web conglomerates may look at directing online traffic more efficiently, causing further disintermediation.
3. Airlines Directly Winning Corporate Contracts Cut Out the Middle Man: Another factor responsible for agency disintermediation is an increased amount of exclusive contracts won by airlines directly. Loss of large contracts with these corporate clients is resulting in further agency struggles. Further, those clients that have been maintained are no longer as profitable, and likely not to be renewed. This is because enhanced connection speeds have increased teleconferencing capabilities, hence reducing demand for business travel (Figure 13).
4. Increased Technological Competition Challenge Agency Revenue At All Stages of Travel: The rises of peer-to-peer travel services is causing further competition and further potential intermediary redundancy. Agencies strive to target consumers at all stages of their travel, such as Source: bitre.gov.au hotel and vehicle hire, where corresponding commissions and packages can be made. However low-cost alternatives like Uber and Airbnb are now also threatening these revenue streams Figure 12: Australian Online (Appendix 3). Consequently FLT’s entire service revenue chain is being threatened due to micro- Travel Agents (OTA) entrepreneurs.
All of these factors are expected to cause future revenue struggles for FLT as a travel intermediary. Consumer preferences clearly favour online direct bookings without agency involvement. As agency online sales are expected to continue stagnating, FLT cannot expect any further growth within the industry from their online platform. Additionally, struggles to maintain corporate contracts, a segment that accounts for 33% of FLT’s total revenues, are expected to be detrimental to sales.
FLT’s Online Expansion Lags Behind the Industry Revenue streams within the industry saw massive growth within the 2012-2013 financial year due to the weak AUD and resulting increased demand for international travel. These excess profits saw many companies within the industry focus on a cost-effective online expansion. FLT however, was not one of them. As a result the Company is expected to face struggles within this platform, Source: IBISWorld particularly as they face enhanced international competition and are falling behind competitors. This
is further elaborated in the Porter’s Five Forces model in Appendix 1. Figure 13: Enhanced
Teleconferencing Ability on Currently, Australia maintains a dominant online presence, with an Internet retention rate of 93.1% Industry Corporate Travel (United Nations, ITU, 2015). Naturally then, consumer preferences highly favour online platforms due to their ease and efficiency, and so these have seen large success within the industry since introduction. Consequently, there is little market share left to be won by those who did not originally expand into the platform, such as FLT. While management aims to grow online TTV to $1B in 2017, this is not feasible with the industry supply chain rapidly transforming. Further, FLT now face competitors who solely exist online and hence have lower costs and higher profit margins. As half of the world's population will have access to the Internet by 2020 (United Nations ITU, 2015), and FLT is lagging behind in an industry expansion that will soon see their current brick and mortar stores become obsolete, it is expected that they will struggle immensely.
Fierce International Competition Limits Organic Revenue Growth FLT has attempted a global expansion over the previous decade, however competition is undeniably
Source: Bloomberg; United Nations high with Expedia.US and Priceline.US dominating the online market as a duopoly. The low likelihood of FLT stealing market share from these dominant players coupled with the eventual industry approach to market saturation both pose large barriers for FLT to gain online revenues.
Figure 14: Market Share of Total Admittedly, the Company has taken a dynamic approach to obtain market share by undertaking a Rides (US) large amount of acquisitions and divestitures, particularly within demographic specific service companies. An example is their acquirement of StudentUniverse (a total overview of all acquisition activities can be found in Appendix 20. However the Company is struggling to transfer its domestic success and economies of scale onto an international platform. Global competitors already hold a large market share that FLT is struggling to steal (Figure 20). As a result the company’s continued acquisitions are expected to be stagnant to revenues and are in fact distracting management from further domestic profits. This is magnified as FLTs decreasing market share in Australia is corroding their economies of scale advantage (Figure 17).
Online Expansion Will Cannibalise Sales and Increase Competition Switching to a multi-channel agency also poses threats for FLT as this will cannibalize their revenue streams. Majority of the Company’s traditional customer base originate from brick and mortar stores. Source: Certify Report By moving online, this opens up an easy platform to compare competitor pricing. Consequently FLT are providing their loyal, store-based customers a method to reconsider their agency options. As a
4
2016 | CFA Institute Research Challenge
result, it is expected that FLT will struggle to retain their in-store customer base through this Figure 15: Airbnb Number of transition, and so sales will suffer accordingly. Nights Booked The Industry Life Cycle Favours High Growth for Competitors FLT currently resides within the mature stage of the industry life cycle. This is resultant from management's strategy to protect its currently dominating market share and secure stable revenues. The company’s competitors however, are all estimated to have a strong growth outlook, and hence in a position to retain market share and greater benefit from industry success. Online competitors Webjet and Helloworld have strong forecasted growth for FY17, largely due to strategic M&A Activity. Although the online market is reaching saturation, these competitors are all stealing proportions of FLTs market share, and so are within the shakeout stage of the industry life cycle (Figure 18).
Source: Cowen &Company; Team Estimates. Investment Summary Figure 16: Porters 5 Forces We issue a sell recommendation for FLT with a 12-month target price of $31.93AUD, representing a 13% downside potential from it’s current stock price of $36.85 on August 31st, 2016. The three valuation techniques used to derive our target price were the Dividend Discount Model (DDM), the Discounted Cash Flow Model (DCF) and Relative Valuation techniques (RV). This downside is driven by: • Lowered agent commissions due to decreases in outbound travel and price wars; • The high costs and little profit potential of international expansion both in store and online due to existing competitors and forecasted online market saturation; • Reduced necessity for agency intermediation within the industry; • FLT’s below average capital structure; and • The Company’s high and inefficient operating expenses and resulting inability to improve low Source: Team Estimates margins.
Figure 17: Industry Market Share Investment Drivers (Australia) Decreased Domestic Agency Commissions: High competition within the industry is resulting in exceedingly low airfares, reducing commission margins for FLT. Despite increased demand due to over-supply; revenues are still expected to decrease accordingly. Further, the weak AUD is resulting in lower outbound travel rates, and so discretionary income is being spent on localised travel, which has comparatively lower profits. While Australia’s cheap currency is increasing foreign travellers, these consumers are likely to use their own respective travel agencies and so such an influx does not lead to profits.
Low Potential for Profitable International Expansion: The online travel industry is highly competitive as it combines direct suppliers and other agency competitors onto one easily comparable platform. Many existing competitors, particularly the dominating international duopoly of Expedia.US and Priceline.US, broke into online platforms earlier than FLT, hence securing a competitive advantage (Figure 20). Consequently, the Company will need to steal existing market share in order to break through within these markets. This is supported by our prediction that the Source: Bloomberg market will reach saturation. The result is an increased price competition placing further downwards pressure on revenue forecasts. Figure 18: Stages in the Industry Life Cycle FLT’s management is currently undertaking expansions through the costly acquisitions of businesses within niche markets. However, this strategy is not permanently sustainable, and does not improve the Company’s organic growth nor steal market share from other existing competitors.
Profit margins of international segments are also significantly lower than those within Australia, as overseas expense structures do not benefit from FLT’s domestic economies of scale (Figure 23; Figure 24). Consequently, management’s focus on international expansion will not result in corresponding shareholder gains.
Lowered Necessity for Travel Agency Intermediation: Four key industry factors are adversely affecting demand for FLT services. Firstly, consumer preferences have shifted to favour local travel: Source: Team Estimates an inherently simpler task generally not requiring intermediation. The industry’s expansion online, Figure 19: FLT SWOT- Analysis secondly, has resulted in higher competition and increased sales between suppliers and consumers directly. FLT is consequently cut out. Airlines are now also targeting large corporate clients, contracts that FLT used to win. These corporate sales account for 33% of FLT revenues. Finally, sales are being challenged at all platforms due to the rise of peer-to-peer travel services. This include companies such as AirBnB and Uber, who are capturing market share from FLT’s car hiring and hotel packages (Appendix 3).
Expensive and Below Average Capital Structure: FLT has the lowest amount of debt financing among key industry players. While this might give reason for upside potential, FLT have confirmed they will not take on any debt capital. Consequently they will continue undertaking much more expensive investments than necessary, falling further behind competitors. Source: Team Estimates
5
2016 | CFA Institute Research Challenge
Figure 20: Revenue Comparison High Operating Expenses Drive Down Profits and Shareholder Returns: While FLT’s TTV (US$ Million) (International) grew consistently over the last five years, this does not translate to their bottom line. This is because expenses are growing at a higher rate than revenue streams, jeopardising profits. Correspondingly, net profit margins have remained consistently low. Majority of the Company’s high operating expenses are derived from rent and salaries, as they heavily rely on their bricks and mortar stores for revenue. Consequently, these low profits are forecasted to continue, and as revenue streams will be declining while expenses maintain steady growth, profit margins will be squeezed (Figure 27).
Dividend Policy FLT's payout ratios over the last five years have been in line with their dividend policy of returning 50-60% of NPAT to shareholders, with the only exception being FY14 when a fully franked Source: Bloomberg dividend of $1.52 led to a payout ratio of 74%. This particular outlier was due to the directors desire to share their strong cash reserves despite a low NPAT for the year. FLT’s current payout Figure 21: Dividends & Payout ratio of 61% also sits slightly higher than usual, with the ten-year average being 55%. Our (%) forecasts expect the Company to pay flat dividends of $1.61 per annum until FY20, as we believe they will maintain a payout ratio of 60% while NPAT stagnates (Figure 21).
Investment Risks The key risks that pertain to FLT include foreign exchange risk, economic risk, operational risk and credit risk. The former risk includes translation and exchange risk due to their multicurrency debt facility. Economic risk includes the high sensitivity global shocks may have on travel behaviours and discretionary spending. The Company faces operational risk through decreasing airfare prices, which lower commission streams, as well as the increasing threat of online competitors.
Source: Bloomberg & Team Estimates
Figure 22: P/E Ratio forecast for FLT, domestic and international peers
Financial Analysis Expensive Capital Structure with No Plans of Changing Comparative to the chosen peer group, FLT now remains the only major company within the travel Source: Team Estimates industry that is not taking advantage of debt financing. (Figure 26). While this may immediately seem like a good reason for upside potential, FLT have never once taken on long-term debt nor Figure 23: International have any plans to. Although in FY16 both ROE and ROIC (18.7% and 18.17% respectively) Segments remain higher than 5 year historical WACC (12%), ROE sits at a second all time low for the company, suggesting future shareholder returns are limited (Figure 25).
High Operating Expenses Limit Equity Returns FLT has continuously boasted a high and consistent ROE, largely as a result of their strong revenue streams. The lack of debt capital creates a small book value size of the company, thus creating an outstanding total asset turnover (Appendix 9). Such efficiency, however, is limited to the books. FLT have an outstanding amount of fixed operating expenses, resulting in a consistently low net profit margin (Figure 27). This has then resulted in an average return on assets comparative to peers. (Figure 28) This translates into their ROE.
Erratic Capital Expenditure and High Lease Commitments Further
Decrease Profit Margins Source: FLT Annual Report The Company’s major downfall lies in its large underlying expenses. Capital expenditure has been volatile and hence not accurately predictable, leading to fluctuating profit margins (Figure 29). Figure 24: Segment Summaries FLT currently utilize straight-line depreciation, which is incremental at 10% of yearly capital expenditure; this expense alone grew 22.2% in FY16. For the previous 2 financial years expenses have grown at a faster rate than revenues (2015: 10.6% to 7.0%, 2016: 13.4% to 11.2%). Further, FLT operate their stores entirely through lease commitments, and so considerable cash flows also go toward paying these rental expenses. FLT have a total of $654M of lease commitments over the next 7 years, with an estimated present value of $529M (Appendix 8). Consequently the Source: FLT Annual Report lack of any clear management strategy between capital expenditure and free cash flow, combined with large amounts of short-term lease commitments, will greatly decrease shareholder value as dividend payouts are hence derived from NPAT.
6
2016 | CFA Institute Research Challenge
Figure 25: ROE and ROA International Expansion Will Jeopardize Net Income Due To Higher Expenses and No Economies of Scale FLT are quick to boast their international income diversity, with Australia comprising 55.4% of total FY16 revenues (Figure 23). However differences in geographical expenses result in drastically different statutory EBIT values, as Australia rose to 74% due to the clear presence of economies of scale within domestic expense structure. Further, the segment’s profit margin stood at an astounding 21.15%, with the Rest of the World and US regions causing concern at 8.32% and 2.7% respectively (Figure 24). As discussed above, management is targeting strong international expansion. In doing so however, the larger expenses faced in non-domestic regions will result in lower profits than if such revenues were made locally. Also, the required capital expenditure to then set up such income streams in these new segments will then further decrease profitability and Source: Bloomberg & Team Estimates efficiency, drastically affecting shareholder value.
Figure 26: WACC Peer Revenues Internationally Are Not Justifying Costs Comparison The company is adamant regarding their strong TTV growth as a major driver of their success, however increased sales volume does not result in corresponding revenue growth. (Appendix 8). When the margin between TTV and revenue is broken down per segment, they severely differentiate, likely due to differentiating commission laws and standards.
Though overall revenue grew 11.2% in FY16, expenses grew 14.61% (13.4% excluding the one off impairment charge), resulting in a 5.8% decrease in EBIT. When broken down into segments, all regions had decreased profit margins in comparison to FY15 (Appendix 6).
As discussed above, FLT is losing market share due to its main competitors deriving online revenue. While this area is one that FLT are looking to explore further, these trends will continue as younger Source: Bloomberg & Team Estimates generations favor a technological approach. Despite the Company addressing this, they are still undertaking large investments into physical assets and employees. This alone increased their wages, Figure 27: Profitability Analysis rental and depreciation expenses by 11.91% in FY16.
The current management plan clearly favours long-term growth however financially this will not result in increased shareholder value in the forecasted period. Instead it is expected that expense growth will continue to surpass sales growth within the next four years, and so any eventual benefits to net income will not fall within the forecasting period. Consequently, as the dividend policy sits at 50-60% of NPAT, these growing expenses will be detrimental to shareholder profit.
Valuation We have used a combination of three valuation approaches: the Dividend Discount Model (DDM), Source: Bloomberg & Team Estimates the Discounted Cash Flow Model (DCF) and Relative Valuation techniques (RV). These have led us to our weighted average target price of $31.93AUD indicating 13% downside potential. Each of Figure 28: Peer ROA these methods have weightings of 20%, 40% and 40% respectively. These were chosen to reflect Comparison that free cash flows are a better indicator of FLT’s future cash flows opposed to dividends, and also to reflect our opinion that multiples are the key driver behind making a stock converge to it’s intrinsic value.
DDM Dividend Discount Model (20%) $27.33 FLT has maintained relatively stable dividend payments over the past 10 years, hence making the DDM an ideal valuation Weighted Value technique. The Company has maintained their policy of returning $31.93 DCF 50% to 60% of NPAT. Therefore, future dividends are predicted RV (40%) (40%) based on this policy being maintained with forecasted earnings. $33.10 $33.07
Source: Bloomberg CAPM: The capital asset pricing model was used to determine FLT's required rate of return at 8.51%.(Figure 31)
Figure 29: Operating Margin Dividend Forecasts: We have assumed the Company will maintain a consistent 60% payout ratio Analysis of NPAT, and hence calculated future dividend payments based on our bearish net income forecasts.
Terminal Growth Rate: The Company’s terminal growth rate was estimated at 3% (Figure 35). Notably, nearly half of FLT’s total revenues are generated from international markets. Therefore we have incorporated the GDP growth rate of domestic and international markets to reach a suitable terminal growth rate. We assigned a weighting of 75% to the average GDP growth rate of the three most dominant markets (Australia, UK and US), consistent with revenue breakdown per segment. The remainder is attributed to an average of Asia and South Africa (Appendix 11).
Two Stage Model: Currently our projected dividends indicate a decreasing trend due to our Source: Bloomberg prediction that net income growth stagnate. However in times of struggling profits, FLT have historically raised the payout ratio to avoid negative dividend signals. As the last three years’ d ividends were paid at flat level, we assume that FLT will undertake a similar strategy on the basis of our forecasted 2017 dividend ($1.61AUD) until 2020. After this, we assume the dividend growth rate will be constant.
7
2016 | CFA Institute Research Challenge
Figure 30: Based on the above information and Appendix 12, we have reached an intrinsic value of $27.33AUD. Additional sensitivity analysis has been conducted with two pairs of variables: payout ratio versus cost of equity and terminal growth rate versus cost of equity.
Discount Cash Flow Model We have also used free cash flows to firm (FCFF) as alternative future cash flow to estimate FLT’s intrinsic value.
Source: Bloomberg. & Team Estimates WACC: We have considered two major uncertainties to estimate the cost of capital: 1. Historically low interest rates could entice FLT to take on more debt; and Figure 31: 2. High volatilities in stock price and pressures upon future earnings create higher risk. Consequently, we used a combination of current WACC (8.3%) and the 10-year historical average WACC (12%) to reach our long-term estimated cost of capital at 10.15% (Appendix 11).
FCFF: We have computed FCFF from Cash Flows from Operations (CFO), which has been projected by directly forecasting its components. Two essential components are receipts from customers and payments to suppliers and employees. 1. We have set the growth rate of receipts at 6.3%, equal to forecasted compounded revenue Source: Bloomberg. & Team Estimates growth from 2017-2020. Historically, these two factors have shown high correlation with minimal spread. Figure 32: 2. Similarly, we set the growth rate of payments equal to the compounded operating cost growth rate for the forecasted period, at 6.7%.
CapEx Growth Rate: FLT has undertaken aggressive expansion in the past five years, and so we assume they will continue to invest in fixed assets in accordance with the historic five-year average CapEx growth rate of 11.5% (Appendix 11).
By applying the same LGR as above, we reached an intrinsic of $33.10AUD. The three key variables used in sensitivity analysis are WACC, CapEx growth rate and LGR (Appendix 13 & 15).
Relative Valuation
Source: Bloomberg & Team Through our relative valuation model, we derived a target price of $33.07AUD using three key Estimates multipliers: Price/Earnings (P/E), Enterprise Value/Earnings before Interest Tax, Depreciation and Figure 33: Amortisation (EV/EBITDA), and Price/Sales (P/S).
This model is then further split into domestic and international to provide insight into differentiating Company expectations within different playing fields. (Appendix:14).
Within the domestic comparable pool we have included HLO:AU, CTD:AU, WEB:AU and also the S&P/ASX Consumer Discretionary Index. International peers consist CTRIP:US, PCLN:US, Source: Bloomberg & Team EXPE:US and the MSCI World Consumer Discretionary Index. All chosen comparables are subject Estimates to similar risks and growth potential. To derive our final intrinsic value, we have combined both Figure 34: target prices, weighting domestic and international target prices based on their forecasted proportions of total revenue as illustrated in Figure 34.
P/E and EV/EBITDA: These multiplies provide an insight into FLT financial health by taking into account both the Company’s capital structure and earnings. Historically, both international and domestic multiples have sat above FLT by the same margin.
Price/Sales: This multiple however, serves as an alternative and is useful for identifying how much revenue the company generates in isolation, with less chance of accounting manipulation. However as the multiple shows a limited picture by only capturing sales, we have assigned a weighting of 20%. P/S has also traded as a discount, with the international pool sitting significantly higher than domestic (Appendix 14).
FLT has maintained a dominant presence in the Australian travel industry, hence explaining the higher target prices in comparison to international for P/E and P/Sales. This further illustrates the risk FLT will face as they expand internationally and compete with the international comparable.
Additional Sensitivity Analysis Both the DDM and DCF methods highly depend on terminal value, in order to neutralise this drawback, we conduct the following analyses to gain further confidence in our recommendation.
Residual Income: One of the key advantages to RI model is the reduced reliance on terminal value Source: Bloomberg & Team Estimates for the determination of intrinsic value. Applying the same variables as the DDM, and taking current book value into consideration, we obtained an intrinsic value of $32.25AUD. This is consistent with the DCF results. Consequently while residual income was not taken into the final weighting arrangement, the RI results confirm the results of our DCF model (Appendix 16).
8 2016 | CFA Institute Research Challenge
Figure 35: Terminal Growth Monte Carlo: In addition to the sensitivity analyses conducted for each method, we have also completed a Monte Carlo simulation on the basis of the DCF. In the simulation, we defined assumptions for five major variables (receipts, payments, CapEx growth, WACC and LGR) and applied reasonable standard deviations. After running 20,000 trials, the simulation results suggest that more than 60% of total possibilities estimate a target price below FLT’s current market price (Appendix 17).
Source: IMF & Team Estimates Scenario: To gain further robustness, a scenario analysis was also conducted based on all three- valuation models, and has been explained with Monte Carlo distribution. The following table Figure 36: Scenario Prices illustrates our forecasts for the decisive variables within the three valuation models for each case: bearish, base, and bullish.
Bearish Assumptions: We assume that FLT’s revenue growth will be below the Australian outbound travel growth rate of 5.5% (Appendix 19). This is then expected to lead to even worse net income growth, and a lowered dividend payout ratio. In this situation, the Company will strive for survival by maintaining a relatively high CapEx growth rate. Further, cost of equity and hence WACC could rise due to higher risk.
Bullish Assumption: Here, we have assumed FLT’s revenue growth rate will outperform their 5Y Source: Bloomberg & Team Estimates average, and stay in line with their historical 10Y long-term growth average by increasing investments. Net profit margin will be improved, which will boost investor confidence and hence decrease WACC. Figure 37: Monte Carlo Scenario Analysis Key Variables Bearish Base Bullish Receipts 5.00% 6.30% 9.00% Payment 6.00% 6.70% 9.00% CapEx 11.15% 11.50% 15.00% WACC 10.89% 10.15% 9.40% Source: Team Estimates Cost of Equity 9.13% 8.51% 7.89% Payout Ratio 50.00% 60.00% 60.00% Figure 38: Risk Matrix Net profit 1.50% 2.00% 12.50% Target Price $23.45 $31.61 $40.71 Up/Downside Potential -36.36% -14.21% 10.46% Probability 0.2455 0.4551 0.2994 Probability Weighted Target Price $32.33 Potential Downside -12.26%
Investment Risks Source: Team Estimates By regressing FLTs monthly returns against the S&P/ASX200 and observing the coefficient of determination, it is evident that FLT’s risk profile is relatively independent from the market. Figure 39: Trade & Other Consequently, approximately 71% of total risk faced by FLT is unsystematic (See Appendix 19 for Payables ($'000) time-varying volatility modelling) This can be attributed to the outlined risks below.
Foreign Exchange Risk FLT plans to expand their international operations (Figure 42), increasing their exposure to foreign exchange rate risk. As illustrated in Figure 39, FLT dramatically increased its foreign trade payables by 118% between 2014 and 2016 (Appendix 22).
FX1 - Translation Risk: For functional and presentation purposes, FLT’s financial statements are recorded in AUD. Transactions occurring overseas are transformed to Australian currency at the time of the transaction. Conversely, Asset and liability translations occur on the date of the statement using the closing rate. Any spreads arising from the translations are then reclassified to profit and loss, which have a history of being highly volatile (Figure 40). Source: FLT Annual Report FX2 - Cash Flow: While forecasted cash flows are highly probable, they can be subject to Figure 40: Net exchange forecasting error as the contracts are re-priced every 12 months. Over the previous 5 years, differences on translation of variations in gains and losses from cash flow hedges have remained relatively low (Figure 41). foreign operations ($'000) Mitigation: FLT is risk adverse in their hedging strategy. The Company aims to minimize exposure and achieve a 1:1 hedging ratio. FLT treasury only enter into forward foreign exchange when exchange forecasts become highly probable. Thus, speculation is not FLT’s hedging strategy.
Economic Risks ER1– Consumer Confidence and travel patterns: Global shocks such as terrorism, political unrest, natural disasters and social pandemics can have an adverse effect on consumer travel confidence, potentially decreasing TTV. Furthermore, changes in discretionary income and exchanges rates can alter consumer travel patterns. Source: FLT Annual Report Mitigation: FLT’s strategy involves increasing their brand and geographic diversification to avoid relying on a single segment.
9 2016 | CFA Institute Research Challenge
Figure 41: Changes in Fair Value Operational Risk of Cash Flow Hedge ($'000) OR1 - Budget Airlines and Price Wars: While lowered airfares result in increased demand, benefits are likely offset as cuts in retail prices also erode commissions and overrides. Individual agreements between each individual airline carrier outline guaranteed payments and volume incentives. Hence if budget airfares continue to trend downwards, commission incentives and margins offered by carriers may decrease to compensate. Mitigation: FLT consultants have lowered their commissions in a bid to increase demand.
OR2 - Technology Disruptions: Rapid and continuous technology expansion of online booking platforms is likely to constrain industry growth and impact FLT market share. Online industry players Source: FLT Annual Report such as Webjet are able to enter the market with little capital and provide heightened price competition. Consumers will then be able to bypass travel agencies and book directly with the travel Figure: 42: FLT Australian provider. Revenue Proportion Mitigation: FLT has acquired a number of brands such as StudentUniverse and BYOjet.com to ensure they maintain significant market share.
Credit Risk CR1 – Credit ratings: FLT is exposed to credit risk through their forward foreign exchange contracts, their cash equivalent and available for sale assets. Mitigation: All FFX contracts and 87% of liquid assets are equivalent to S&P rating AA to A- (Appendix 21).
Figure 43: Board of Directors Corporate Governance Board of Remuneration Ordinary Directors FY16 ($) shares Governance Graham 675,000 15,244,487 As an ASX listed company, FLT utilizes the corresponding corporate governance principles. While Turner Managing most principles are implemented, the company does not separate the remuneration and nomination Director/CEO committees as per Principle 2: ‘structure the board to add value’. Consequently, FLT has a rating of Gary Smith 201,218 15,000 4.49 out of 5 based on our estimations, so is bested by some competitors such as Corporate Travel N.E. Director Management, who have implemented all principles (Appendix 27). FLT meets all six OECD Chairman John Eales 150,848 3,000 Corporate Governance Principles. Further, the Company shows growth in their environmental and N.E. Director social scores yet a decline in corporate governance as provided by the Thomson Reuters Asset4 Robert Baker 150,503 2,500 database (Figure 45; Appendix 25). N.E. Director Board of Directors Source: FLT Annual Report FLT’s independent directors only hold small amounts of shares, which could lead to a moral hazard, as they may not act in the shareholder’s best interest but rather in their own (Figure 43). Further, Figure 44: Board Members FLT has the smallest board of directors’ comparative to all peers worldwide, with only four members opposed to the international average of eight (Figure 44). Consequently, the Company does not have a separate audit and remuneration committee. Also, FLT does not have a female director. This has been historically proven as suboptimal, as females improve company performance, risk management and the quality of the decision making process. The absence of such diversification and gender equality can lead to one-sided decisions (Appendix 26).
Corporate Social and Environmental Responsibility The Company founded the Flight Centre Foundation in 2008, supporting organisations engaged in movements for the environment, children, education and cancer support (Appendix 23). FLT provides employees the opportunity to volunteer their time to charities and community organisations while still being paid, and matches their donations dollar for dollar. The Company was recently Source: Bloomberg appointed to the top ten ASX listed charity givers (Australian Charities Fund, 2016). The Foundation's charity partners are non-political and receive limited or no support from any Figure 45. FLT ESG-Scores government entity. Overall, donations to communities since its foundation amounted to $7.7 million Asset4 at the end of the 2016 financial year.
Source: Thomson Reuters Database
10 tg2016 | CFA Institute Research Challenge
Appendix: 1 Force 1: Threat of New Entrants 1) Strict Regulatory and financial monitoring pressures on new agents Supplier Power 2) Existence of Economies of Scale and incumbent exclusive partnerships makes entry difficult and/or unprofitable 3) Rise of technology based travel advice allows low cost and Threat of Threat of New innovative myriad micro-entrepreneurs to quickly gain market Substitution Entry share. However online market heavily dominated. 4) Higher comparable Profit Margins for Online Travel Booking services 5) Large Network effect of current market leader (FLT) provides Competitive Buyer Power more tailored and cost effective service to clients. Rivalry Force 2: Threat of Substitute Products 1) Holds largest market share, however there are highly substitutable branch and online travel booking services. 2) Other Flight Planning Services, particularly low-cost online travel booking services. However, buyers are still dependent on a quality face-to-face tailored servicing. 3) Brandjacking: illegal use of popular brands by brandjackers to drive traffic to their sites without the permission of brand owners. Potentially drawing away revenue and reputation of FLT. 4) Disintermediation: Especially on a domestic level, as Australian’s typically avoid travel agents when travelling domestically. Additionally airlines are now directly approaching customers reducing potential commissions for FLT. Force 3: Bargaining Power of Buyers 1) Easily substitutable for other agents, and thus can negotiate price wars between agents. 2) Information Asymmetry: Lack of pricing information, especially on grounded services (hotels) between customers and suppliers creates dependency of buyers. This due to the complexities of travel. Force 4: Bargaining Power of Suppliers/Sellers 1) High Threat of backward integration from Airline suppliers due to online pricing 2) Grounded travel Services (hotels) have little influence of FLT, as their revenues are highly dependent on the agency relationship. 3) High Competition between suppliers, creates higher commission potential, and low bargaining power. 4) Enhanced Capacity and supply of available airline seats has enhanced the negotiating power for agents to receive more commissions in order to fill the excess supply.
Force 5: Competition in the Industry 1) The Innovative Deployment of online travel agency models are showing higher levels of profitability than store- based agents. 2) Enhanced online competition has forced FLT to enhance their online presence to keep market share. But, this has cannibalised their store sales. 3) Still the market leader with economies of scale advantage. 4) Competition is fierce for offering low-cost travel services, hence marketing, brand awareness and online strategy will give the competitive advantage.
Appendix 2: Current Issues affecting Travel Spread of the Zika Virus
Most Popular Travel Destinations for Australian Travellers (ABS Data)
New Zealand Indonesia USA UK
Thailand China
Singapore Fiji
Japan India
11 tg2016 | CFA Institute Research Challenge
Zika Virus The top 10 international destinations for Australian Travellers are shown in the above table. The transmission of the deadly Zika virus has been reported in 50% of the most popular travel destinations. Thus, it is expected that international travel demand will decrease through fear of contraction when travelling. Although it could be argued that the Zika virus would simply cause travellers to change their travel destination, this is not so easy. A key reason for these travel locations is their low-cost, and short distance from Australian Airports. The majority of south-east Asia has been infected by the Zika Virus, and thus the closest alternative is the European region or the northern parts of Asia. However, these are generally more expensive alternatives and thus may not be of adequate substitution for Australian Travellers. There is also the alternative for the Middle East, but travel to these countries has decreased by the effect of terrorist associations which are discussed next.
Terrorism Since 2000, there has been a nine-fold increase in the number of deaths from terrorism. More recently the events in Global Terrorism Threat France, Bangladesh, turkey, United States as well as Australia highlight the increased threat at high-target areas. 50,000 The Australian Government has listed mass gathering places Number of such as hotels, markets, public transport, airports and tourist 40,000 Incidents sites are a common target for terrorism activities. Australian’s Deaths are viewed by the levant (ISIL) as a key target for terrorist 30,000 attacks. Even in cases where Australian’s weren’t Injuries necessarily the target, Australian citizens are still harmed by 20,000 indiscriminate attacks. The immense fear from Australian Travellers particularly after events in 2016 has created a 10,000 culture that hesitates to travel. A common trait is to cancel 0 flights and travel after a major terrorism event, even if it is in 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 another country. A survey in 2015 compiled by YouGov has shown that 10% of American travellers have cancelled their trip in response to terror, and 18% have delayed their travels. The world is now on red alert (figure 3), and we expect this Source: Global Terrorism Database adjustment to consumer preferences will cost the travel industry, and thus the travel agent industry.
Brexit The effect on the UK leaving the European Union caused an immediate downturn on the world travel market. However the effects on airline share price, exchange rates and consumer confidence have already started to adjust from June. However the long-term effects are not fully realised yet. We expect the travel industry in Australia to have limited effect from the Brexit other than a decrease of UK tourists in Australia, which would be offset by an increase of Australian passengers to the UK. Although, once the Brexit is fully undertaken there may be a change in visa protocol which overrides the current no-visa policy for Australians holidaying in the UK and EU. Ultimately the Brexit has the biggest effect on the UK and European travel market. Thus with FLT deriving 13% of their profits and revenues from this continent, they are at risk of long-term revenue slowdowns. The International Air Transport Association has predicted by 2020 UK air passengers could be 3-5% lower due to a downturn in economic activity and fall in sterling.
The Insurance Industry The insurance industry has faced rising costs in the form of reinsurance expenses over the past five years. An unusually high incidence of natural disasters and terrorist encounters around the world has led to a rise in the volume and value of insurance claims, forcing reinsurers to increase premiums (Wu, 2016). Ultimately, indirect costs of travel are increasing and this correlates with a decreased consumer confidence in travel due to the current aforementioned global risks. What was once seen as a safe and reliable place to travel, is now sacrificed due to the increasing threat of terrorism. Which has forced insurance companies to raise their risk-adjusted premiums. This problem also relates to FLT’s Travel insurance revenue stream. Thus enhanced insurance premiums are reducing the total Passenger outflow as well as the profit margins of Flight Centres Insurance Products. Source: Wu. T. (2016). IBISWorld Industry Report OD4216. Travel Insurance in Australia. Retrieved from http://www.ibisworld.com.au
Appendix 3: The Sharing Economy The Travel industry like most industries are rapidly expanding into peer-to-peer services. The low-cost options as well as direct exposure to locals is providing a more authentic and cost-saving experience compared to traditional Travel operations. Micro-entrepreneurs are offering alternatives in an array of travel sectors such as hotels (Airbnb), transportation (Uber, Lyft), dining (Eatwith, Feastly) and tours (Viator, Vayable). This growth is not just left for leisure travel, business travellers are increasingly adapting their Travel & Expenses (T&E) budget for more cost-effective sharing economy services.
12 tg2016 | CFA Institute Research Challenge
Holiday rental sites like Airbnb, are currently the main driver of growth in peer-to-peer travel services. HVS a global hospitality service has estimated that hotels are losing approximately $450 million in direct revenues per year due to the peer-to-peer economy. Additionally amongst a survey of 300 hotel groups, 70% predict Airbnb will pose a significant threat over the next 3 years. These effects have large impacts on the revenue of Flight Centre hotel commissions.
Uber and other ride-share tech companies have now surpassed the total transactions for car rental companies, which were once a typically stable revenue stream for travel agencies. This has been caused by a fundamental change of business and leisure consumer preferences. The increased convenience of hailing and payment efficiencies is encouraging the switch to Uber. On a corporate level, ride-sharing is becoming the industry normality for business travel. Especially as Uber has released a business platform which allows employees to charge their rides directly to the corporation's expense account. This poses a large threat to the car-rental industry, and this is evident from large car rental companies like Hertz and Avis experiencing depreciating share value.
However, there is positives for the industry. Rental car companies like Hertz have partnered with Uber to rent older cars to Uber drivers unable to afford a car. Thus Hertz can secure rentals on older cars they would typically sell. Although the additional revenues may offset some lost revenues caused by Uber, the same cannot be said for travel intermediaries. Flight Centre only receives commissions from their travel clients renting cars, thus the substitution for the more cost- effective Uber, will decrease the commission potential from the car rental revenue stream of FLT.
AirBnB Number of Nights Booked Airbnb Satisfaction Vs. Hotels 600 500 Leisure 7% 400 Airbnb less satisfactory 10% Corporate 300 200 30% Airbnb about the same 100 39%
No Nights Booked (Mil) No Nights Booked 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 63% Est. Est. Est. Est. Est. Airbnb more satisfactory Source: Cowen &Company ; Team Estimates 51%
0% 15% 30% 45% 60% 75% Source: Cowen &Company ; Goldman Sachs.
Market Share of Total Rides Market Share of Total Rides (Q2 2016)
60.00% 54.70% (US) 50.00% 48.70% 14% 37.20% Ride Hailing 40.00% 30.00% 37.30% Car Rental 20.00% 14% 48.70% Taxi 10.00% 8.10% 37.30% 0.00% Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016
Ride Hailing Car Rental Taxi Source: Certify Report Source: Certify Report
Major Car Rental Companies: Stock Performance 80 Avis (CAR.US)
60 Hertz (HTZ.US)
40
20 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16
Source: Bloomberg Sources: Certify. (2016). Certify SpendSmart Reports. The Changing State of Business Travel. Retrieved from https://www.certify.com/Infograph-SpendSmart- Full-Year-2015.aspx Goldman Sachs. (2016). 2,000 US Consumers – Goldman Sachs Global Investment Research. Retrieved from http://www.goldmansachs.com/what-we- do/research/ Kurtz. M. (2014). HVS Reports. In Focus: Airbnb’s Inroads into the Hotel Industry. Retrieved from http://www.hvs.com/article/6952/in-focus-airbnbs-inroads-into- the-hotel-industry/. Wu. T. (2016). IBISWorld Industry Report OD4216. Travel Insurance in Australia. Retrieved from http://www.ibisworld.com.au
13 tg2016 | CFA Institute Research Challenge
Appendix 4: Travel Disintermediation The intensity of competition between intermediaries and direct suppliers is predicted to continue to intensify particularly in the airline and hotel sales sub-sectors. Hotels are constantly overwhelmed by the market power, and thus reliance on travel intermediaries. Thus Hotels have low negotiating power which corresponds to high commission for travel agents. Consequently, they have been active in their direct distribution with strategies like loyalty programs, social media interaction, metasearch channels and review sites. These strategies are working, and are expected to cause a comparable increase in their bookings through disintermediated marketing. Airlines are also in large competition and thus suffer from low negotiating power with travel agents. These non-negotiable costs from commissions can impose on profit expansion. Additionally, airlines have a problem marketing ancillary services with travel intermediation, as sales are typically a standard seat with no up-selling potential. Thus airlines are adapting online and re-utilising commission payments into offering customers increased flexibility, additional services as well as rewards for customers booking directly. Thus by 2018 we predict the inflow of customers for hotels and airlines will increasingly come from direct online bookings, with intermediation sales remaining stagnant. A study by the European Journal of Tourism Research was conducted to analyse the preferences out of 5, and thus favourability towards the disintermediation when making hotel reservations. The following key points were derived: • The internet is preferred for convenience goods and low-involvement products, while traditional channels (travel agents) are preferred for complex products. But the complexities are progressively being relieved with further online innovation. • Occasional travellers preference travel agent interaction, while frequent buyers prefer online booking services, thus disintermediation. • Most respondents are open to further utilising direct online bookings if the process becomes more flexible, cost-effective, convenient and available 24/7. Which is continually coming to fruition. Source: Source: Del Chiappa, G., Lorenzo-Romero, C., & Gallarza, M. G. (2015). Attitudes towards disintermediation in hotel reservations: Spanish travellers' profile. European Journal of Tourism Research, 9, 129-143.
Appendix 5: Big Data Analytics With a Targeting Advertising system, tourism operators can advertise directly to interested consumers with a Google Advertising Revenue history of relevant travel searches. As the ads are targeted, the cost are lower as there is no need for a 120.0 globalised mass marketing strategy. A once competitive advantage of 80.0 selling contracts to large travel agencies able to mass market. Google is forever progressing to a complete online service. Therefore there recent 40.0 induction into travel intermediation is in line with this objective. The launch of Google Hotel Finder and Google Flights although currently a slow- 0.0
growing utility, still possesses potential with ever expanding service $USD of Billions functionality. Thus Google, will shake-up the travel industry and play a large part in its future. Evident in countless industries Google has entered. Source: Bloomberg
Facebook is the largest Social media platform, and Facebook Advertising Revenue is important for the travel industry in marketing to 80.0 consumers. Facebook is a key tool in the inspiration and willingness to travel due to the photo and experience sharing functionality. Thus it is beneficial to the travel industry. However, the 40.0 capacity for hotels and airlines to directly market to their customers as well as create a continual customer engagement is stimulating disintermediation, leaving travel agents irrelevant. The ever expanding 0.0 Billions $USD of Billions member growth is further incentivising travel operators to adopt this marketing strategy and this is represented by the increasing advertising revenues of Facebook. Source: Bloomberg
TripAdvisor is the world’s largest online TripAdvisor Revenue Growth platform offering travel reviews on hotels, 3.0 restaurants, attractions and destinations. With 340 million unique monthly visitors interacting with 350 million reviews 2.0 and opinions covering 6.5 million accommodations, restaurants and attractions, the site is a large data tool within the travel industry. 1.0 With the review platform being the foundation of the site there is more reliable and transparent services directed to clients. Additionally the site 0.0 offers a metasearch function which compares the prices of these travel $USD of Billions options with the added benefit of reviews and opinions. The site has thus become a travel intermediary, with the utility of huge data analytics. The comparative metasearch function enhances the competitive landscape Source: Bloomberg between airlines, hotels as well as internal intermediaries, ultimately reducing margins across the globalised industry. The
14 tg2016 | CFA Institute Research Challenge increased revenues of Trip Advisor is indicating these travel services are advertising more directly to their consumers online through a review-based large-data platform rather than using a travel agent.
Appendix 6: TTV and EBIT Breakdown
EBIT values are non-statutory and unreconciled. All figures are displayed in AUD
Appendix 7: Segment Margin Break-downs by country 2016: Displayed in Millions Australia US & Mexico Europe Rest of the World TTV 10,045.9 3,003.3 2,164.4 3,732.5 Revenue 1,323.6 333.2 331.4 467.8 Revenue Margin 13.2% 11.1% 15.3% 12.5% Statutory EBIT 280.0 9.0 50.3 38.9 Profit Margin 21.2% 2.7% 15.2% 8.3% 2015: Displayed in Millions Australia US & Mexico Europe Rest of the World TTV 9,561 2,454 1,893 3,413 Revenue 1,234.6 287.0 285.9 417.5 Revenue Margin 12.9% 11.7% 15.1% 12.2% Statutory EBIT 271.7 22.1 52.4 33.3 Profit Margin 22.0% 7.7% 18.3% 8.0%
Appendix 8: Financial Statement Forecasts Total Transaction Value FY FY FY FY FY ($'000,000) 2017F 2018F 2019F 2020F 2012 2013 2014 2015 2016 TTV 13,238 14,359 16,049 17,598 19,305 20,608 21,879 23,095 24,234 Australia 7,845 8,516 9,116 9,561 10,046 10,347 10,606 10,818 10,980 Rest of the World 2,410 2,670 3,117 3,413 3,732 4,031 4,333 4,637 4,938 US & Mexico 1,684 1,727 2,089 2,454 3,003 3,454 3,937 4,449 4,983 United Kingdom & Europe 1,154 1,188 1,533 1,893 2,164 2,381 2,571 2,726 2,835 Other Segment 145 159 195 276 359 395 431 465 498 Income Statement ($'000,000) Revenue 1,786.8 1,950.5 2,212.4 2,367.4 2640.3 2877.8 3057.6 3221.5 3371.7 Australia 1,023 1,112 1,222 1,235 1,324 1,357 1,393 1,422 1,438 Margin 13.0% 13.1% 13.4% 12.9% 13.2% 13.1% 13.1% 13.1% 13.1% Rest of the World 300 333 367 406 434 485 519 550 587
15 tg2016 | CFA Institute Research Challenge
Margin 12.4% 12.5% 11.8% 11.9% 11.6% 12.0% 12.0% 11.9% 11.9% US & Mexico 204 208 247 287 333 406 460 517 577 Margin 12.1% 12.1% 11.8% 11.7% 11.1% 11.8% 11.7% 11.6% 11.6% United Kingdom & Europe 157 174 224 268 314 341 372 393 407 Margin 13.6% 14.7% 14.6% 14.2% 14.5% 14.3% 14.5% 14.4% 14.4% Other Segment 144 159 184 201 262 288 314 339 363 Margin 99.8% 99.9% 94.3% 72.7% 72.9% 73.0% 73.0% 73.0% 73.0% Operating Expenses 1,460 1,565 1,820 1,955 2,231 2,421 2,599 2,749 2,890 Growth 7.2% 16.3% 7.4% 14.2% 11.26% 12.28% 11.27% 12.24% Salaries Wages and Employee 952 1,038 1,152 1,284 1,433 1,590 1,718 1,821 1,912 Benefits Growth 9.1% 11.0% 11.4% 11.6% 11.00% 8.00% 6.00% 5.00% Rental Expense 114 116 129 143 159 172 183 188 194 Growth 2.4% 10.6% 11.2% 10.7% 8.7% 6.0% 3.0% 3.0% Other 396 418 483 529 621 659 698 740 784 Growth 5.6% 15.8% 9.4% 17.5% 6.0% 6.0% 6.0% 6.0% EBITDA 327 386 392 413 409 456 459 473 482 EBITDA Margin 18.2% 19.8% 17.7% 17.4% 15.5% 15.9% 15.0% 14.7% 14.3% Capital Expenditure 45 41 46 73 94 105 117 130 145 Growth 12.1% -8.5% 13.2% 56.9% 29.5% 11.5% 11.5% 11.5% 11.5% Dep & Amort 49 49 54 54 66 76 87 98 111 EBIT 277.8 336.4 338.2 358.8 343.0 380.2 372.2 374.2 371.0 Total Non-Operating Loss -13 -13 15 -7 -2 -4 -2 0 -3 Pretax Income 289.4 349.3 323.7 366.3 345.0 384.3 374.6 374.5 374.3 Income Tax Expense 90 103 117 110 100 112 109 109 109 Tax rate 31.21% 30.19% 30.76% 30.06% 29.13% 29.12% 29.12% 29.12% 29.12% Net Income 200 246 207 257 245 272 265 265 265 Net profit Margin 11.20% 12.62% 9.35% 10.84% 9.26% 9.47% 8.68% 8.24% 7.87% Growth 23.0% -16.0% 24.0% -4.7% 11.4% -2.5% 0.0% -0.1% Balance sheet FY FY FY FY FY ($'000,000) 2017F 2018F 2019F 2020F 2012 2013 2014 2015 2016 Total Current Assets 1,554 1,785 1,888 2,153 2,263 2,477 2,711 2,968 3,249 Total Noncurrent Assets 561 588 523 635 738 808 884 968 1,059 Total Assets 2,115 2,373 2,410 2,788 3,001 3,001 3,001 3,001 3,001
Total Current Liabilities 1,149 1,288 1,261 1,453 1,567 1,715 1,877 2,055 2,249 Total Noncurrent Liabilities 108 59 51 65 89 Total Liabilities 1,258 1,346 1,313 1,518 1,655 1,812 1,983 2,171 2,376
Total Equity 857 1,026 1,098 1,270 1,346 1,473 1,612 1,765 1,932 Total Liabilities & Equity 2,115 2,373 2,410 2,788 3,001 3,285 3,596 3,936 4,308
Converting Lease agreements into Debt Present Value of Future Lease Commitments Commitment Present Value Assumptions and Notes Year ($'000,000) ($'000,000) 1. Commitments between 1 to 5 and 6 to 7 years are 1 139.167 131.29 averged in order to compute present value 2 84.261 74.99 2. Pre-tax cost of debt is used as discount rate to 3 84.261 70.75 compute PV = 6% 4 84.261 66.74 3. Lease commitments are from end of 2016 Financial 5 84.261 62.96 Year 6 89.0415 62.77 Commitment ($'000,000) 7 89.0415 59.22 <1 139.17 Total 654.294 528.72 1 to 5 337.04 Stated Operating income 241.2 6 to 7 178.08 + PV of Lease commitments 528.72 Total Commitments 654.29 * Pretax cost of debt 6% PV of Commitments 528.72 = 272.92
16 tg2016 | CFA Institute Research Challenge
Appendix 9: Du-Pont Breakdown 2012 2013 2014 2015 2016 Net Profit Margin 11.20% 12.62% 9.35% 10.84% 9.26% Asset Turnover 0.88x 0.87x 0.93x 0.91x 0.91x ROA 9.90% 10.97% 8.65% 9.87% 8.45% Asset / Equity 2.53x 2.38x 2.25x 2.20x 2.21x ROE 25.04% 26.13% 19.48% 21.67% 18.70%
Appendix 10: ROA Comparison 2012 2013 2014 2015 2016 FLIGHT CENTRE 9.9% 11.0% 8.7% 9.9% 8.5% CORPORATE TRAVEL 16.6% 11.3% 8.7% 7.7% 8.2% MANAGEMENT WEBJET LTD 25.3% 6.9% 14.4% 10.5% 11.3% Average 17.3% 9.7% 10.6% 9.4% 9.3%
Appendix 11: Significant Valuation Variables Explanation 1. Capital Asset Pricing Model (CAPM). This report utilises CAPM to determine FLT’s cost of equity
CAPM Explanation a) Beta. Regression of FLT’s weekly returns against ASX200 using 2- Beta 0.928 (a) year data. Adjusting the raw beta (0.892) to reflect future beta under Risk-Free Rate 2.95% (b) assumption that security’s true beta will move towards to market Market Premium 6.00% (c) average of 1 over time. Formula used in adjustment: 0.67 x Raw Beta Cost of Equity 8.51% + 0.33 x 1 = 0.928 b) Risk-Free Rate. 10-year Australia government bond yield was chosen as reference rate. Given that 10Y government bond yield has been decreasing dramatically and there are still more uncertainties on future cash rate, we decide to combine the average of past two-year and five-year average yield to represent future risk free rate.
10Y Australia Government Bond Historical Average Yield 2-Year Average 5-Year Average Weighted Yield 2.64% 3.26% 2.95% Source: Bloomberg c) Market Premium. The market Premium was extracted from ‘KPMG Valuation Practices Survey 2015’ and ‘Social Science Research Network’, all of which indicate a 6% premium of Australia equity market. Furthermore, potential volatility of market premium has been incorporated into sensitivity analysis.
Source: KPMG Source Social Science Research Network
2. Terminal Growth Rate
17 tg2016 | CFA Institute Research Challenge
In this report, we use GDP growth rate as the indicator of future terminal growth rate. However, FLT’s revenue from domestic operations has shrunk considerably, hence Australia GDP growth rate no longer has the full representativeness. Following tables demonstrate the process of estimating terminal growth rate.
2006 2007 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F Australia 3.1% 3.8% 2.7% 3.1% 2.7% 2.3% 2.3% 2.8% 3.3% 3.00% 3.03% 2.94% 2.78% US 2.67% 1.78% 2.53% 1.60% 2.22% 1.49% 2.43% 2.43% 2.40% 2.50% 2.38% 2.13% 1.96% UK 2.7% 2.6% 1.5% 2.0% 1.2% 2.2% 2.9% 2.2% 1.89% 2.22% 2.21% 2.14% 2.11% Asia 10.11% 11.20% 9.64% 7.83% 6.92% 6.91% 6.76% 6.59% 6.40% 6.32% 6.26% 6.32% 6.34% South Africa 5.60% 5.36% 3.04% 3.21% 2.22% 2.21% 1.55% 1.28% 0.61% 1.21% 2.06% 2.40% 2.40% Source: IMF
Historical Average Forecasted Average Weighted Average Final Weighting G x W AU 2.9% 3.0% 2.93% US 2.1% 2.3% 2.21% UK 2.2% 2.1% 2.13% Average of developed market 2.42% 75% 1.8% Asia 8.24% 6.33% 7.29% South Africa 3.06% 1.74% 2.40% Average of emerging market 4.84% 25% 1.2% Terminal Growth Rate 3.0% Source: Team Estimates 3. Weighted Average Cost of Capital (WACC) FLT’s WACC has been swing since global financial crisis. We weighted its 10-year historical average WACC and current WACC to arrive at 10.15%, which is also consistent with 10-year average WACC excluding GFC outliers. In the scenario analysis, we use this two reference WACC with different weightings to determine WACCs for bearish and bullish cases.
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 WACC 7.50% 7.29% 16.23% 16.37% 14.85% 12.62% 11.25% 12.02% 11.58% 8.83% Current WACC 8.30% 10Y Average 12.00% Equal weighting 10.15% Source: Bloomberg, Team Estimates Bearish Case WACC Bullish Case WACC WACC weighting W x W WACC weighting W x W Current WACC 8.30% 30% 2.49% Current WACC 8.30% 70% 5.81% 10Y Average 12.00% 70% 8.40% 10Y Average 12.00% 30% 3.60% Weighted Average 10.89% Weighted Average 9.41% Source: Team Estimates
4. Capital Expenditure Growth Rate (CapEx) FLT’s capital expenditure experienced dramatic increase in the past 5 years. We assume this trend will continue given that its international and digital expansion are most likely maintained, but the abnormal growth occurred in 2015 was eliminated from our estimation.
Capital Expenditure Growth Rate Year 2011 2012 2013 2014 2015 2016 Capital Expenditure Growth Rate -39.84 -44.57 -40.78 -46.21 -72.50 -93.85 CapEx Growth Rate 11.9% -8.5% 13.3% 56.9% 29.5% Average (Excluding abnormal in 2015) 11.5% Source: Team Estimates
Appendix 12: DDM Valuation FY2016 2017F 2018F 2019F 2020F Net Profit After Tax 259.14 272.43 265.49 265.44 265.28 Payout Ratio 0.61 0.60 0.60 0.60 0.60 Dividend Paid 158.40 163.46 159.29 159.27 159.17 Weighted Average Ordinary Shares(WAOS) 100.90 101.71 102.53 103.35 104.18 DPS 1.52 1.61 1.55 1.54 1.53 DPS, Adjusted 1.52 1.61 1.61 1.61 1.61 Underlying Dividend Growth 0.06 0.00 0.00 0.00
18 tg2016 | CFA Institute Research Challenge
Terminal Value 30.08 Present Value 1.48 1.37 1.26 22.85 Intrinsic Value Intrinsic Value (2016/6/30) 26.96 Target Price(2016/08/30) 27.33 Current Price(2016/08/30) 36.85 Downside Potential -26% Source: Team Estimates
Appendix 13: DCF Valuation Forecast FY2016 2017F 2018F 2019F 2020F Cash From Operating Activities Receipts From Customers 2680.2 2849.05 3028.54 3219.34 3422.16 Payments To Suppliers And Employees -2213.90 -2362.23 -2520.50 -2689.37 -2869.56 Cash Paid For Taxes -108.5 -121.23 -135.45 -151.34 -169.09 Cash Paid For Interest -28.85 -29.59 -30.35 -31.12 -31.92 Interest Received 27 27.46 27.94 28.42 28.91 Total Cash Flows From Operations 355.95 363.47 370.18 375.92 380.49
Free Cash Flow to Firm Year FY2016 2017F 2018F 2019F 2020F CFO 355.95 363.47 370.18 375.92 380.49 Interest Expense 28.85 29.59 30.35 31.12 31.92 (1-Tax) 0.71 0.71 0.71 0.71 0.71 CapEx 93.90 104.70 116.74 130.16 145.13 FCFF 282.50 279.74 274.95 267.82 257.98 Terminal Value 3716.41 Present Value 253.96 226.62 200.40 2699.81
Intrinsic Value Sum of PV 3380.78 Debt 76.80 Value of Equity 3303.98 WAOS 101.00 Intrinsic Value(2016/06/30) 32.71 Target Price (2016/08/31) 33.10 Current Price 36.85 Upside potential -10%
Source: Team Estimates & Bloomberg Appendix 14: Multiple Pricing Model Assumptions 1. Weighting between domestic and International is based off forecasted proportion of FLT's domestic and international revenue 2. Forecasted peer multiples sourced from Bloomberg L.P, Earnings & Estimates 3. Historical date contains outliers and therefore medians are used to determine discounts 4. Target Price calculations are based off pro forma financial statements Earnings Multiplier (P/E) Ticker 2011 2012 2013 2014 2015 2016 2017F Domestic Webjet Ltd WEB AU 13.84 17.97 50.92 9.98 13.62 25.88 24.27 Helloworld HLO AU 16.03 29.84 8.97 — — 162.11 25.29 Corporate Travel CTD AU 14.44 11.9 27.52 33.79 36.69 32.41 31.64 Management S&P/ASX 200 Consumer AS51COND 19.99 24.99 36.79 1,149.25 19.74 18.08 Discretionary Index Index
Industry Median for each 15.235 17.97 26.255 33.79 36.69 29.145 24.78 year Flight Centre Travel Group FLT AU 15.44 9.46 16.01 21.6 13.39 14.38 Historical 1% -47% -39% -36% -64% -51% Premium/Discount Historical Median Discount -43%
International 2011 2012 2013 2014 2015 2016 2017F
19 tg2016 | CFA Institute Research Challenge
CTRIP CTRIP US 20.89 28.33 45.11 178.43 42.21 129.2 44.13 Priceline Group PCLN US 22.94 22.23 31.65 24.91 26.01 21.06 17.88 Expedia EXPE US 11.9 22.73 33.2 25.62 73.35 22.91 17.3 MSCI World Consumer MXWO0CD 14.72 18.04 18.9 18.38 18.79 16.76 14.86 Discretionary Index
Industry Median for each 17.805 22.48 32.425 25.265 34.11 21.985 17.59 year Flight Centre Travel Group FLT AU 15.44 9.46 16.01 21.6 13.39 14.38 Historical -13% -58% -51% -15% -61% -35% Premium/Discount Historical Median Discount -43%
Target Price (P/E) 2017F Domestic International P/E peers median 24.78 17.59 Discount 43.19% 42.61% Target P/E 14.08 10.10 EPS 2.69 2.69 Target Price 37.94 27.21 Weighting 47% 53% Weighted Target price 32.27
EV/EBITDA Ticker 2011 2012 2013 2014 2015 2016 2017F Domestic Webjet Ltd WEB AU 8.64 11.05 23.74 5.86 6.4 20.84 15.24 Helloworld HLO AU 9.84 10.98 3.76 3.1 — — 7.62 Corporate Travel CTD AU 9.86 7.43 16.69 20.53 20.39 19.17 19.92 Management S&P Consumer Discretionary AS51COND 9.11 36.95 12.93 14.37 17.95 14.49 13.32 Index Index
Industry Median for each 9.475 11.015 14.81 10.115 17.95 19.17 14.28 year Flight Centre Travel Group 5.21 2.79 7.07 8.19 4.89 5.98 Historical -45% -75% -52% -19% -73% -69% Premium/Discount Historical Median Discount -61% International Ticker 2011 2012 2013 2014 2015 2016 2017F CTRIP CTRIP US 13.88 22.48 35.64 1198 213.6 — 43.55 Priceline Group PCLN US 14.63 14.42 21.7 18.06 18.97 17.18 14.76 Expedia EXPE US 6.1 11.15 12.13 13.28 22.86 11.62 9.34 MSCI World Consumer MXWO0CD 7.54 8.4 9.81 10.05 9.85 9.79 8.16 Discretionary Index
Industry Median for each 10.71 12.785 16.915 15.67 20.915 11.62 12.05 year Flight Centre Travel Group 5.21 2.79 7.07 8.19 4.89 5.98 Historical -51% -78% -58% -48% -77% -49% Premium/Discount Historical Median Discount -55% Target Price (EV/EBITDA) 2017F Domestic International EVEBITA peers 14.28 12.05 Discount 60.53% 54.78% Target EV/EBITDA 5.64 5.45 EBITDA 456 456 Implied EV (BB) 2572 2487 less Debt 1812 1812 Add Cash & Cash Eq 1600 1600 Value of Equity 2360 2275 Outstanding Shares 101 101 (million) Target Price 23.35 22.51 Weighting 47% 53% Weighted Target price 22.90
20 tg2016 | CFA Institute Research Challenge
P/Sales Ticker 2011 2012 2013 2014 2015 2016 2017F Domestic Webjet Ltd WEB AU 3.53 4.29 4.6 2.02 2.04 3.79 4.71 Helloworld HLO AU 0.92 0.46 0.44 0.42 0.58 0.93 1.58 Corporate Travel CTD AU 2.57 2.15 4.02 4.88 4.89 5.24 5.37 Management S&P Consumer Discretionary AS51COND 1 1.18 1.57 1.42 1.57 1.59 1.8 Index Index
Industry Median for each 1.785 1.665 2.795 1.72 1.805 2.69 3.255 year Flight Centre Travel Group 1.18 1.06 2.02 2.02 1.45 1.21 Historical -34% -36% -28% 17% -20% -55% Premium/Discount Historical Median Discount -30.81%
International Ticker 2011 2012 2013 2014 2015 2016 2017F CTRIP CTRP US 6.06 4.65 7.34 5.27 8.33 7.77 5.73 Priceline Group PCLN US 5.33 5.88 8.71 7.06 7.04 6.64 5.73 Expedia EXPE US 1.14 2.05 1.97 1.91 2.42 1.92 1.68 MSCI World Consumer MXWO0CD 0.73 0.84 1.15 1.14 1.19 1.08 1.03 Discretionary Index
Industry Median for each 3.235 3.35 4.655 3.59 4.73 4.28 3.705 year Flight Centre Travel Group 1.18 1.06 2.02 2.02 1.45 1.21 Historical -64% -68% -57% -44% -69% -72% Premium/Discount Historical Median Discount -65.94% Target Price P/Sales In Millions except per share Domestic International P/Sale peers 3.26 3.71 Discount 31% 66% Target P/SALES 2.25 1.26 Sales 2878 2878 Outstanding Shares (millions) 101 101 Sales Per Share 28.47 28.47 Target Price 64.11 35.92 Weighting 47% 53% Weighted Target price 49.22
Appendix 15: Sensitivity Analysis DDM Sensitivity Analysis DCF Sensitivity Analysis Scenario 1: Payout Ratio & Cost of Equity Scenario 1: CapEx Growth Rate & WACC Rationals: Rationals 1. Company could change dividend payout ratio either upward or 1. WACC could rise if either increase in cost of equity or substantial downward due to potential furure better off or distress use of debt 2. FLT's cost of equity could increase or decrease due to high volatility or depreciation of aggregate risk free rate Cost of Equity CapEx Growth 27.33 7.50% 8.00% 8.51% 9.00% 9.50% 33.10 10.5% 11.0% 11.5% 12.0% 12.5% 50% 33.13 29.84 27.10 24.90 23.00 11.0% 30.10 29.84 29.58 29.31 29.04 Payout 55% 33.26 29.97 27.22 25.03 23.13 WACC 10.5% 32.12 31.84 31.56 31.27 30.98 60% 33.38 30.09 27.35 25.15 23.25 10.2% 33.70 33.40 33.10 32.80 32.50 65% 33.51 30.22 27.47 25.28 23.38 9.5% 37.08 36.75 36.42 36.09 35.75 70% 33.64 30.34 27.60 25.40 23.50 9.0% 40.18 39.82 39.46 39.10 38.73
Scenario 2: Cost of Equity & Terminal Growth Rate Scenario 2: WACC & Long Term Growth Rationals: 1. Terminal growth rate could be in line with historical sustainable growth rate 2. Cost of equity could rise when company increase leverage Cost of Equity Long Term Growth 27.33 7.50% 8.00% 8.51% 9.00% 9.50% 33.10 2.5% 2.7% 3.0% 3.3% 3.5% 2.5% 30.5 27.7 25.4 23.5 21.9 11.0% 28.19 28.73 29.58 30.50 31.15 Growth 2.7% 31.6 28.63 26.15 24.15 22.4 WACC 10.5% 29.96 30.57 31.56 32.62 33.38 3.0% 33.4 30.09 27.35 25.15 23.3 10.2% 31.34 32.02 33.10 34.29 35.14 3.3% 35.5 31.74 28.68 26.26 24.2 9.5% 34.26 35.08 36.42 37.89 38.95 3.5% 37.0 33.0 29.7 27.1 24.8 9.0% 36.90 37.88 39.46 41.21 42.48 21 tg2016 | CFA Institute Research Challenge
Earnings Multiplier (P/E) EV/EBITDA Scenario 1: Discount & EPS Scenario 2: Debt & EBITDA Rationals: Rationals: 1. Changes to industry comparables can cause the discount rate to 1.FLT can increase or decrease their debt levels increase further or become a premium 2. FLT's Earnings may increase or decrease 2. FLT's Earnings may increase or decrease Domestic Domestic Discount Debt 37.94 39% 41% 43% 45% 48% 23.35 1631 1721 1812 1902 1993 2.43 36.74 35.44 34.14 32.85 31.55 411 22.60 21.70 20.80 19.91 19.01 2.56 38.78 37.41 36.04 34.67 33.30 434 23.87 22.97 22.08 21.18 20.28 EPS 2.69 40.82 39.38 37.94 36.50 35.05 EBITDA 456 25.14 24.24 23.35 22.45 21.56 2.83 42.86 41.35 39.83 38.32 36.81 479 26.41 25.52 24.62 23.72 22.83 2.96 44.90 43.32 41.73 40.15 38.56 502 27.68 26.79 25.89 25.00 24.10
International International Discount Debt 27.21 0.38 0.40 0.43 0.45 0.47 28.04 1631 1721 1812 1902 1993 2.43 26.30 25.39 24.48 23.58 22.67 411 26.82 25.92 25.03 24.13 23.23 2.56 27.76 26.80 25.85 24.89 23.93 434 28.32 27.43 26.53 25.64 24.74 EPS 2.69 29.23 28.22 27.21 26.20 25.19 EBITDA 456 29.83 28.93 28.04 27.14 26.25 2.83 30.69 29.63 28.57 27.51 26.44 479 31.34 30.44 29.55 28.65 27.75 32.15 31.04 29.93 28.81 27.70 32.84 31.95 31.05 30.16 29.26 2.96 502
P/Sales Scenario 3: Discount & Sales Rationals: 1.FLT can increase or decrease their debt levels 2.FLT's earnings can increase or decrease Domestic Discount 64.11 27.73% 29.27% 30.81% 32.35% 33.89% 2590 $60.27 $58.99 $57.70 $56.42 $55.13 2734 $63.62 $62.26 $60.91 $59.55 $58.19 Sales 2878 $66.97 $65.54 $64.11 $62.68 $61.26 3022 $70.32 $68.82 $67.32 $65.82 $64.32 3166 $73.66 $72.09 $70.52 $68.95 $67.38
International Discount 35.92 59.35% 62.64% 65.94% 69.24% 72.54% 2590 38.59 35.46 32.33 29.20 26.07 2734 40.73 37.43 34.13 30.82 27.52 Sales 2878 42.88 39.40 35.92 32.45 28.97 3022 45.02 41.37 37.72 34.07 30.42 47.17 43.34 39.51 35.69 31.86 3166 Appendix 16: Residual Income Valuation FY2016 2017F 2018F 2019F 2020F Book Value 13.34 14.39 15.46 16.44 17.40 EPS 2.57 2.68 2.59 2.57 2.55 Dividend 1.52 1.61 1.61 1.61 1.61 Residual Income 1.43 1.45 1.27 1.17 1.07 Terminal value 19.92 PV 1.34 1.08 0.92 15.14 Intrinsic Value 31.82 Target Value 32.25 Current Price 36.85 Downside Potential 14%
22 tg2016 | CFA Institute Research Challenge
Appendix 17: Monte Carlo Simulation Variables Mean St.Dev Distribution Forecast: Target Price Receipts Statistics: Forecast values 2017F 2849.053 85.47 Normal Trials 20,000 2018F 3028.543 90.86 Normal Base Case 33.1 Mean 33.61 2019F 3219.341 96.58 Normal Median 33.29 2020F 3422.16 102.66 Normal Standard Deviation 13.82 Payments Variance 190.98 2017F -2362.23 70.87 Normal Skewness 0.1685 2018F -2520.5 75.62 Normal Kurtosis 2.84 2019F -2689.37 80.68 Normal Coeff. of Variation 0.4111 2020F -2869.56 86.09 Normal CapEx Growth Rate 11.50% 0.35% Normal WACC 10.15% 0.30% Normal LGR 3.00% 0.09% Normal
Appendix 18: Scenario Analysis
In addition to the scenario analysis for DCF, we further extend this DDM and RV (P/E) to arrive the weighted average intrinsic value under each case. The chart on the left briefly present the final aggregate scenario analysis
Bearish case has a value of AUD23.45, while bullish case has a price at AUD40.71. This represents 25% probability downside and 30% probability upside potential in accordance with Monte Carlo simulation distribution. However, overall, there would be more than 60% probability that the stock price will below current price.
23 tg2016 | CFA Institute Research Challenge
Appendix 19: Australia Short-term Outbound Travel Modelling & Stock Return Volatility Modelling
1. Multiplicative SARIMA (Seasonal Autoregressive Moving Average Model) FLT generates half of its annual revenue within Australia, on which outbound travel has a significant impact. Therefore we forecast the next 5-year outbound travel movement by using a multiplicative SARIMA to model this essential growth driver. The graph on the right demonstrates the trend of movements, and the table below illustrates the forecasted future outbound travel growth.
Australia Short-term Outbound Travel (In Thousand) Year 2016 2017 2018 2019 2020 2021 Outbound 9685 10180 10823 11442 12068 12711 Growth Nil 5.1% 6.3% 5.7% 5.4% 5.3% 2016-2020 average 5.5%
2. GARCH (Generalized Autoregressive Conditional Heteroskedasticity) Although FLT is currently traded with a relatively lower beta, it is necessary to examine its time-varying volatility. By running GARCH model, we found the GARCH effect is significant indicating its time-varying riskiness. This result further support our argument relating to the potential up/downward cost of equity and WACC. The graph on right side presents the time-varying standard deviation of FLT’s stock since its IPO in comparison with historical return standard deviation
Appendix 20: Recent Acquisitions
Acquisitions Date Currency Price Stake Main Objective Student Universe 21st December US$ $28m 100% Expand Online Platform BYO Jet 21st December AUD$ $2.52+ 70% Entry into Low-cost Market Business Travel 14th March € Unknown 100% Expansion into European Market Development
Student Universe Overview Student Universe is currently the world’s leading travel booking service for students and youth. They offer special student online rate on flights, hotels and tours. The company is in association with dozens of World-class partners and over 70 Airlines. Student Universe launched in 2000 and has branches in Boston, London, Toronto, New York and the Philippines. Details of the Acquisition The Acquisition was made on the 21st December 2015 for $US 28 million after 18 months of negotiations. The agreement states that student universe will operate under the management of Flight Centres Americas President. Acquisition SWOT Analysis Strengths Weaknesses • Enhanced economies of scale power • Intense online competition • Strong Online Platform • Concentrated international competition • Leading youth travel booking service • Heavily US Based • Overvalued acquisition Opportunities Threats • Expand Online Presence • Alternative Management leading to inefficiencies • Access Niche Market (Key Demographic in • Online Market Saturation Travel) • Unrecognized revenue expectations • Student and Youth Market is one of Travel’s fastest growing sectors. 24 tg2016 | CFA Institute Research Challenge
BYOJET Overview BYO Jet is an Australian family owned and operated travel agency that operates in Australia, New Zealand, Singapore and South Africa. Launch in 2010, the company is an online booking service which offers the lowest price guarantee on over 300 worldwide airlines. Details of the Acquisition Flight Centre Acquired a 70% stake of BYOjet on the 21st of December, after 3 months of negotiation. Flight Centre will pay BYOjet's parent company Professional Performance Systems $2.52 million upfront, plus a second payment for 70 per cent of 6 times the online business' 2016 financial year EBIT, less the original amount. There has also been placed call and put options, so that Flight Centre may control 100% of the company in 2018. Acquisition SWOT Analysis
Strengths Weaknesses • Enhanced economies of scale power • Undefined cost of Acquisition creates additional risk • Decreased competition • Intense online competition • Expanded employee base • Concentrated international competition Opportunities Threats • Financial options to acquire remaining 30% in • Alternative Management leading to inefficiencies 2018. • Enhanced EBIT of BYOjet may lead to expensive • Expand Online Presence acquisition • Better exposure to Asia Markets • Online Market Saturation • Exposure into low-cost market • Low-cost sales can cannibalise full service revenues.
Business Travel Development (FCM Travel Solutions) Overview Business Travel Development was a Dutch Travel Agency with a store-based operation. They specialised in full-service corporate travel for business clients. They have had a lengthy relationship with Flight Centre, having been the network’s independent licensee in the Netherlands since 2005. Details of the Acquisition Flight Centre has acquired 100% of Business Travel Development to continue operations in the Netherlands. The company originally named Business Travel Development will now operate under the Flight Centre corporate brand FCM Travel Solutions. This new business will be overseen by Flight Centres UK office. The cost of this acquisition is currently undisclosed. Acquisition SWOT Analysis Strengths Weaknesses • New exposure into Europe • New competition in unknown market • Larger Corporate travel coverage • New branding has very low market awareness • Access to Netherlands Market • Low-risk and cost-effective entry into Netherlands market Opportunities Threats • Better exposure to European Markets • Undisclosed price is alarming to shareholder sentiment • Diversify Corporate Travel operations • Alternative Management leading to inefficiencies • Decreasing Corporate travel passenger growth
Acquisitions since 2010
Year Company Announced Details Based in Total Value 2010 FCm Travel Solutions India $15 million Purchase of remaining 44% interest India Private Ltd Gapyear.com N/A Social Networking Business UK Garber’s Travel Services Inc $10.4 million Purchase of the remaining 74% interest in Garber to US the 26% FLT acquired in 2007; Corporate Travel Provider 2012 GoVolountouring Ltd A$130,000 Online community for volunteers, overseas teachers, Canada and learners' abroad 2014 Travelplan Corp Ltd A$2.07 million Corporate travel business UK (Ireland) Top Deck Tours Ltd US$15.9 million Specialized in tour operations UK 2015 Koch Overseas de Mexico US$1.4 million Corporate travel management business Mexico Travelonomy ltd US$28 million Studentuniverse.com (Appendix 19) US
25 tg2016 | CFA Institute Research Challenge
Professional Performance US$1.81 million Owners and operators of BYOjet Group which is an AUS Systems Pty Ltd online travel agent specialized in ultra low cost airfares 2016 Professional Performance US$0.5 million AUS Systems Pty Ltd AVMIN Pty Ltd A$1.224 million Aircraft charter and logistics specialist AUS Worldwide Aviation Services A$297,000 Small corporate travel business MY (WAS) Maya Events A$361,000 Event management and production company HK Business Travel Development A$2.649 million Corporate Travel Agency based in the Netherlands NL Source: Bloomberg and Company Information
Appendix 21: Credit Rating
Credit Rating - Cash, Cash Equivalents & 2014 2015 2016 AFS Financial Assets % $'000 % $'000 % $'000 At 30th June $'000 AA and Above 0.75% 9,756 0.00% 2 0.01% 189 AA to A- 91.25% 1,188,912 88.74% 1,289,933 87.14% 1,324,926 BBB+ to BBB 5.20% 67,724 8.94% 130,023 10.45% 158,828 Non-investment grade/ unrated 2.80% 36,530 2.32% 33,688 2.40% 36,566 Total 1,302,922 1,453,646 1,520,509
Appendix 22: Foreign Payable and Receivable Exposure
Trade and other Trade & Other 2014 2015 2016 2014 2015 2016 payable Receivables Australia 763,308 622,162 1,003,462 Australia 555183 648182 646677 Us Dollar 92,249 251,862 332146 US Dollar 15954 21816 20567 British Pounds 11,323 14,811 24519 British Pound 674 858 707 Euro 24,345 30,361 54284 Euro 1705 8468 1034 Thai Baht 17,974 19,408 798 Fijian Dollar 334 778 770 Fijian Dollar 23,709 25,706 20099 New Zealand 720 796 976 New Zealand Dollar 10,680 11,105 14232 Other 1902 2142 1445 Canadian Dollar 5,865 6,089 9097 Total Trade and other 576472 683040 672176 Hong Kong Dollar 4,270 4,226 4666 receivables Singapore Dollar 8,491 9,261 9760 21289 34858 25499 Total Foreign Trade United Arb Emirates 3,966 3,998 1325 and other receivables Dirham Increase/Decrease of foreign exposure between 2014 & Other 14,384 14,179 2706 19.78% 2016 Total Trade and other 980,564 1,013,168 1,477,094 Source: Flight Centre Travel Group, 2015 payable liabilities Total Foreign Trade and other Payable 217,256 391,006 473,632 Liabilities Increase/Decrease of foreign exposure 118.01% 391,006 between 2014 & 2016
Appendix 23: FLT Foundation
Bush Heritage Australia is a non-profit organisation and is based in Melbourne, Australia. It does purchase land to manage wildlife reserves in perpetuity. In this way they do protect native plants and endangered species to ensure Australia’s biodiversity.
The Cambodian Children’s Trust works to empower vulnerable children to escape the cycle of poverty through family preservation, education and deinstitutionalisation. It is a local NGO with more than 90% of the staff are from Cambodia.
Foodbank is the largest non-profit organisation in Australia which distributed food to those who have difficulty purchasing enough food to avoid hunger. In 2015 they provided enough food for 40 million meals.
26 tg2016 | CFA Institute Research Challenge
The Kokoda Track Foundation is an aid organisation with the objective to improve the education, health and community services in Papa New Guinea. FLT supports the Education Bilong Olgeta Program contributing to teacher training and development, salaries and school resources for the Elementary School in Kokoda and the Kou Kou Pre-school.
Redkite is an Australian cancer charity which provides support to children and young people with cancer. Furthermore, it supports their families and support networks. FLT assists Redkite’s Diagnosis Support Pack program which includes vital care and comfort as well as critical information to help along their journey. Furthermore, it provides information and age-appropriate items for teenagers and young adults up to the age of 24.
Youngcare assists people between the ages of 18 to 65 with high care needs. Their programs focus on supporting young people with a disability by providing greater choice in housing and care options. FLT supports Youngcare Connect which is a free national information and support line which helps families navigate through the often confusing healthcare system.
Source: Company Data
Appendix 24: SWOT Analysis
Total Strengths 30 25 20 15 Total Total Threats 10 Weaknesses
Total Opportunities
The SWOT analysis was created to establish a better understanding of FLT's position within the travel industry. The analysis is built around a series of categories within each of the four SWOT sections and ranked on a scale to three according to their likely impact on FLT. Furthermore, this point system was used to determine the overall performance of FLT in the respective category which can be seen in the chart above.
Strengths Weaknesses • Diversification of services: complete and tailored experience • Dependency on Australian Market: 74% of EBIT across different sectors like flights, hotels, cruises, currency, car derived in AU rental, visa assistance • Inefficient capital structure • Multiple segments: leisure, online, wholesale and corporate. • Cost structure: High operating expenses • Expansive Growth Strategy • Insufficient online presence • Large Market Share domestically • Existing distribution and sales networks
Opportunities Threats • Strategic Acquisitions • Diseases, Terrorism, Economic downturns • Brand Strength: Allows for easier integration into the • Brandjacking: online diversion of search traffic online/physical business dynamic • Increasing online travel service competition • Disintermediation: especially domestically • Backward integration from Airline suppliers due to online pricing • Small board and missing diversity
27 tg2016 | CFA Institute Research Challenge
Strengths Rating Weaknesses Rating
Financial Strategy Resources 3 3 Facilities Profitability Cost/Price Reputation 2 2 Cost Management 1 Market Structure Management 1 Leadership 0 0 Property Marekting Service Economies of Development Development Scale Internal Brand Image Marketing Competitive Operations Effectiveness Pressure Service Line Proprietary Technology Opportunities Rating Threats Rating
Expansions 3 Pricing 3 Prospects Target Market Substitute Technology 2 Products 2 Regulatory Service 1 Market Overhead Enhancement Entry Barriers 1 Stagnation 0 0 International Vertical Regulatory Expansion Integration Demographics Overhead Expansion of Market Growth Market Facilities Business Cycle Requirements Rival Buyer/Supplier complacency Power Appendix 25: Thomson Reuters Asset4 To investigate Flight Centre’s environmental, social and corporate governance performance, the Asset4 Database by Thomson Reuters was used. Moreover, local and international peers have been selected to evaluate FLT’s current performance.
Social Score
60 Flight Centre Travel Group 50 Ltd. 60 40 30 Local Peers 50 20 40
Axis Title Axis 10 International 30 0 20 2013 2014 2015 Peers 10 Axis Title 0 2013 2014 2015 30 Environmental Score 25 20 15 10 5 0 2013 2014 2015
Appendix 26: Gender diversity Studies from Desvaux & Devillard (2008), Campbell & Mínguez-Vera (2008), Smith, Smith, &Verner (2006) and TCAM (2009) showed, that gender diversity on company boards improve company performance. A study conducted by Joy, Carter, Wagner, & Narayanan, S. (2007) found out that companies with more women on board outperformed their rivals with 42% higher returns in sales, 66% higher returns on invested capital and 53% higher returns on equity. A gender- balanced board is furthermore more likely to pay attention to managing and controlling risk. (TCAM, 2009)
28 tg2016 | CFA Institute Research Challenge
Other findings of relevant studies include: • Women control about 70% of global consumer spending. Consequently, women can provide a broader insight in economic behaviour which leads to market share gains through the creation of services and products that are more respondent to costumer’s needs (Bloomberg, 2009). • The quality of the corporate governance and ethical behaviour is high in companies with high shares of women on boards (Brown & Brown, 2002). • The quality of decision making increases with diversity on boards as adding complementary knowledge, skills and experience means a gain of innovation and creativity (European Commission, 2012). • The number of women as independent directors is positively associated with a firm’s CSR ratings (Hyun, Yang, & Jung, Hong, 2016). Furthermore, the European commission made a legislative proposal in 2012 with the focus of improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures (European Commission, 2012). The proposal targets companies to increase the number of board members of the under-represented sex to 40% by the 1st of January 2020. However, there will be no sanctions for not reaching this goal. Sources: Bloomberg. (2009). Women Controlling Consumer Spending Sparse Among Central Bankers. Derived from http://www.bloomberg.com/news/2011- 07-24/women-controlling-70-of-consumer-spending-sparse-in-central-bankers-club.html Brown, D. A., Brown, D. L., & Anastasopoulos, V. (2002). Women on boards: Not just the right thing... but the" bright" thing. Conference Board of Canada. Campbell, K., & Mínguez-Vera, A. (2008). Gender diversity in the boardroom and firm financial performance. Journal of business ethics, 83(3), 435- 451. Desvaux, G., & Devillard, S. (2008). Women Matter 2: Female leadership, a competitive edge for the future. Study, McKinsey & Company, Paris. European Commission. (2012). Women in economic decision-making in the EU: Progress report Luxembourg. Hyun, E., Yang, D., Jung, H., & Hong, K. (2016). Women on boards and corporate social responsibility. Sustainability, 8(4), 300-300 Joy, L., Carter, N. M., Wagner, H. M., & Narayanan, S. (2007). The bottom line: Corporate performance and women’s representation on boards. Catalyst, 3, 619-625. Smith, N., Smith, V., & Verner, M. (2006). Do women in top management affect firm performance? A panel study of 2,500 Danish firms. International Journal of productivity and Performance management, 55(7), 569-593. TCAM. (2009). Diversity and Gender Balance in Britain plc: a study by TCAM in conjunction with The Observer and as part of the Good Companies Guide, London
Appendix 27: Corporate Governance The ASX corporate governance principles have been used to evaluate FLT’s corporate governance. The only principle FLT does not fulfil completely is principle 2 (a): structure the board to add value. The reason for this is that they have not a separated their nomination committee from their remuneration committee. By calculating corporate governance scores, different weightings were given to the ASX principles. Higher weightings were given for the composition of the board and a fair and responsible remuneration. To have a benchmark, FLT’s competitor Corporate Travel Management implements all eight ASX corporate governance principles and has therefore a higher score than FLT based on our estimations. ASX Principles Score Weightings FLT Corp. Travel 1. Lay solid foundations for management and 5 5 12% oversight 2. Structure the board to add value 2 5 17% 3. Act ethically and responsibly 5 5 12% 4. Safeguard integrity in corporate reporting 5 5 9% 5. Make timely and balanced disclosure 5 5 11% 6. Respect the rights of security holders 5 5 11% 7. Recognise and manage risk 5 5 13% 8. Remunerate fairly and responsibly 5 5 15% Weighted final Score (out of five) 4.49 5
Board of Directors Career Background Independent Graham Turner Graham Turner is one of the Co-Founders of Flight Centre and was appointed No Managing as a member of the board at the IPO in 1995. He is the head of the company Director/CEO and in the role of the CEO for more than 20 years (with a pause in 2005). Additionally, he is the Director of the Australian Federation of Travel Agents Limited. Gary Smith Mr. Smith has been a Director of Flight Centre since 2007. He is the the founder Yes Non-Executive and managing director of Tourism Leisure Corporation and in addition he Director manages the Kingfisher Bay Resort Group. From 2003 to 2007, Gary was an Chairman independent Director of the then publicly listed Tourism Company S8 Limited. In November 2012, he was appointed as a Non-Executive Director to the Board 29 tg2016 | CFA Institute Research Challenge
of Michael Hill International Limited (MHI). He has an active role in the tourism and travel industry Australia’s for 20 years. John Eales Mr. Eales has been appointed to the board of Flight Centre in 2012. Yes Non- Furthermore, he currently sits on the board of GRM International, International Executive Quarterback, Fuji Xerox – DMS and the Australian Rugby Union. He was the Director Co-founder of the Mettle Group in 2003, which was acquired by Chandler MacLeod in 2007. Robert Baker Robert Baker has been a non-executive Director of Flight Centre since 2013. Yes Non-Executive He has had a successful career at PricewaterhouseCoopers (PwC) in leading Director their Office in Brisbane, providing professional services to clients and in being a member of PwC’s Board from 2008 to 2013. Mr. Baker is also in the function of the chairman in four other companies (John Goodman & Co Ltd since 2014, International Justice Fund Limited since 2015, Employment Office Australia Pty Ltd since 2015, Audit and Risk Committee of the Australian Catholic University Limited since 2015). Furthermore, Robert is an advisory board member and Audit and Risk Committee member for the Catholic Development Fund, Archdiocese of Sydney since 2011. Cassandra Kelly* Cassandra Kelly has been appointed to the board of Flight Centre in 2014. She Yes Non-Executive is the Co-founder and chair of corporate advisory Pottinger, deputy Director chairwoman of Treasury Corporation of Victoria, chairwoman of Allpress *resigned on the 2nd of International and director of UNSW Foundation Limited. However, she August 2016 resigned her role on the board of FLT effective with the 2 August 2016 due to her current living situation in the USA and because she wants to spend more time with her family.
Appendix 28: Insitutional Investors Top 20 Institutional Shareholders % 1. Gainsdale PTY LTD 15.06% 2. GeharPTY LTD 14.53% 3. James Management Services 12.87% 4. Bennelong Fund Management 6.11% 5. Airlie Fund Management Pty Ltd 4.78% 6. Vanguard Group 3.33% 7. Blackrock 3.19% 8. Friday Investments Pty Ltd 2.79% 9. Lazard Ltd 2.32% 10. Perennial Value Management 1.67% 11. Norges Bank 1.62% 12. Schroders Plc 1.52% 13. Investment Mutual Ltd 1.36% 14. FMR LLC 1.00% 15. Commonwealth Bank of Australia 0.96% 16. AQR Capital Management LLc 0.94% 17. State Street Corp 0.93% 18. Trinity Holding Ltd 0.74% 19. Morgan Stanlet 0.73% 20. Perpetual Ltd 0.62% * Turner Graham 15.10%
30 Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Sydney, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge