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Flight Centre share price: the great liquidity question

We examine the measures Flight Centre may implement to shore up its balance sheet and liquidity position.

Flight Centre share price Source: Bloomberg

As economic output across the globe slows to a crawl, companies seem to be realising that cash is king and liquidity is what truly matters.

Of course, many investors and market commentators already knew this, but amongst a decade long bull market, it seems to have been somewhat forgotten; replaced by slogans such as ‘cash is trash’ and a proclivity to value companies based on sales not earnings.

The liquidity question

Flight Centre – leveraged against both consumer spending and impacted by the near-complete shutdown of the travel industry – has seen its share price decline significantly in the last few months.

Though currently in a voluntary trading suspension, Flight Centre (FLT) last traded at just $9.91 per share – a far cry from the company’s 52-week high of $49.14 per share.

To shore up its balance sheet in these trying times, Flight Centre has rushed to close stores, reduce staff, put a freeze on its marketing initiatives and is even 'hoping to offload a St Kilda Road office tower for as much as $60 million,' according to Commercial Real Estate.

The exchange at least has provided Flight Centre with some breathing room, with the ASX on Monday approving the company’s request to extend its current trading suspension, as it continues to work through the ‘impact of the coronavirus on its business.’

Ever-impatient investors however got a glimpse into what that impact may look like, with Morgan Stanley last week releasing a note detailing its analysis of FLT’s liquidity position.

Here the investment bank argued that:

‘Based on available liquidity (excluding client cash) of ~A$483m (as at Feb 29, disclosed on 13 March), and assuming ~80-90% declines in TTV, ~75% variability of the cash operating cost base and near-term working capital outflows of ~A$50m per month, we estimate ~4mths of liquidity.’

From Morgan Stanley’s view and considering the current economic environment, this leaves Flight Centre two to four months ‘short of what we consider a prudent travel industry minimum.’

In contrast, the investment bank estimates that Qantas (QAN) has 8 to 12 months of liquidity – when assuming comparable levels of revenue/ capacity impairment.

Flight Centre share price: where next?

Ultimately, Morgan Stanely concludes that Flight Centre requires between $200 million and $400 million of additional liquidity, in order to stay within the prudent industry minimums.

Theoretically, the investment bank notes that ‘this could be in the form of some combination of bank debt, government support or equity.’

In spite of all this, Morgan Stanely still has a lofty price target of $42.00 per share on FLT; though the investment bank notes that it may revise this price target when further visibility is gained on the company's liquidity and balance sheet strategy, amongst other factors.

How to trade travel and airline stocks

Though Flight Centre remains suspended from trade, investors can still trade companies like Qantas and Sydney Airport – long or short – through IG’s world-class trading platform.

For example, to buy (long) or sell (short) Qantas using CFDs, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘QAN’ or ‘Qantas’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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