Are Investors Undervaluing Flight Centre Travel Group Limited (ASX:FLT) By 34%?
- Using the 2 Stage Free Cash Flow to Equity, Flight Centre Travel Group fair value estimate is AU$27.54
- Current share price of AU$18.18 suggests Flight Centre Travel Group is potentially 34% undervalued
- Analyst price target for FLT is AU$18.67 which is 32% below our fair value estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Flight Centre Travel Group Limited (ASX:FLT) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for Flight Centre Travel Group
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
|Levered FCF (A$, Millions)||AU$56.9m||AU$307.1m||AU$434.3m||AU$499.3m||AU$498.2m||AU$500.4m||AU$504.8m||AU$510.9m||AU$518.1m||AU$526.2m|
|Growth Rate Estimate Source||Analyst x4||Analyst x5||Analyst x5||Analyst x2||Analyst x1||Est @ 0.44%||Est @ 0.88%||Est @ 1.20%||Est @ 1.42%||Est @ 1.57%|
|Present Value (A$, Millions) Discounted @ 8.8%||AU$52.3||AU$259||AU$337||AU$356||AU$327||AU$302||AU$280||AU$260||AU$243||AU$226|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$2.6b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.8%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = AU$526m× (1 + 1.9%) ÷ (8.8%– 1.9%) = AU$7.8b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$7.8b÷ ( 1 + 8.8%)10= AU$3.4b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is AU$6.0b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of AU$18.2, the company appears quite undervalued at a 34% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Flight Centre Travel Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.8%, which is based on a levered beta of 1.156. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Flight Centre Travel Group
- Net debt to equity ratio below 40%.
- Shareholders have been diluted in the past year.
- Expected to breakeven next year.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Good value based on P/S ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Flight Centre Travel Group, we've compiled three pertinent factors you should assess:
- Risks: Case in point, we've spotted 2 warning signs for Flight Centre Travel Group you should be aware of.
- Future Earnings: How does FLT's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Flight Centre Travel Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Flight Centre Travel Group
Flight Centre Travel Group Limited provides travel retailing services for the leisure and corporate sectors in Australia, New Zealand, Americas, Europe, the Middle East, Africa, Asia, and internationally.
High growth potential and good value.