Travel operator, Flight Centre has spent the past six years proving why a late 2006 offer from management and private equity at $17.20 a share, was a steal that was rightly rejected.
The shares passed $40 this week in what can only be complete vindication by one major non-insider shareholder (Lazard) who rejected the offer. It’s something a lot of companies and their shareholders should remember (and media and brokers) when private equity offers appear, are made and rejected.
Poor performers such as Billabong should not be taken as being representative of the class of companies where apparently richly priced offers are rejected and the shares fall and people say the deal should have been accepted.
The operational performance of Flight Centre in the past six years and the rise in the price of its shares (In fact they hit a 52 week high yesterday of $41.80) tells us that had the buyout been accepted, then shareholders would have been deprived of a substantial bit of outperformance.
In fact the shares are up more than 100% in the past year alone. When looking at the high-low range, the outperformance is even more astonishing – from a low of $17.01 (under the offer price back in late 2006) to the high of $41.80.
Flight Centre – 12-Month Performance
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For a while though, the $17.20 offer looked good as the shares took a bit of a hammering in the GFC, but as the Aussie dollar rebounded in 2009-10, so did Flight Centre’s revenues and profits and the company hasn’t looked back.
It’s yet another example of why management is an important element in value creation – even if they tried to capture it for themselves and a private equity friend.
Driving the share price higher was the upgrade in 2012-13 earnings by the company which now expects to earn as much as $320 million pre-tax, (with the bottom of the new range $325 million) compared with its previous guidance of $305 to $315 million.
That compares with pre-tax earnings in 2011-12 of $290 million, so the improvement will be in the range of 12% to 17% if the new guidance is met.
Seeing Flight centre earned around $170 million in 2007, the improvement in profits has helped underwrite the surge in the share price. Earnings in 2010 were just over $198 million (all before tax), so the improvement in earnings since then is even more apparent.
Flight Centre managing director Graham Turner said in the upgrade statement that the businesses in all 10 countries in which the company operated were profitable and several were set to post record pre-tax earnings this year.
He said the leisure business in its key market of Australia had rebounded in the second half of the financial year to more than offset a ‘‘slightly softer’’ corporate travel market. The company said the UK business is on track to deliver annual pre-tax earnings of more than 20 million pounds ($30 million), a rise of more than 30% from the previous year.
The improvement came on the back of the higher dollar since February. Tuesday’s rate cut could undermine the shares in the short term, but the dollar’s rebound yesterday seems to have eased those fears. Flight Centre is really a play on the dollar’s high value, and the surge in offshore travel by Australians.
According to figures from the Australian Bureau of Statistics, the number of people leaving Australia for overseas travel rebounded in March after two weak movements in January and February.
Seasonally adjusted departures were up 3% in March from February at 707,100 and followed falls of 0.1% in february and 1.4% in January of this year. The ABS said there was a 3.5% rise in people leaving Australia in March compared with March, 2012, and a 0.2% rise (to nearly 697,000) in March from February.
Arrivals rose 2.3% in March, seasonally adjusted from February (these are mostly inbound tourists, some of whom would have been captured by Flight Centre’s offshore offices). Overall, the ABS said inbound movements in March were 5.0% higher than in March of last year, a sign the high dollar is not really damaging the attractiveness of Australia to offshore visitors, especially those from China. Visitors from China in March were 15% above the level of a year earlier, while those from Singapore rose more than 14% in the same time.
Outbound movements to Singapore jumped 20%, while those to China were up 8%.
