Favorite Stock to Short, page-257

This seems nuts.

I'm paying 2.75B for ~800m cash and PBT of 343m in 'normal' times.

You're paid very well just to wait out the virus.

@Klogg

That is exactly how I’m looking at this unfolding situation. At its current price, one can buy a good-quality, essentially debt-free business for only ~10x FY19 NPAT, and I personally see no reason why FLT’s earnings should not revert to (at least) that level once the disruption from the Coronavirus is over.

So the question for me, right now, is whether the Company can manage through this period of disruption, which could potentially result in a material revenue squeeze, without the need for a capital injection.

In this regard, I would use a word of caution as to whether the reported 837m$ could be used in its entirety to offset a period of negative operating cashflow. If you look at Note 9 in the half-year result, you can see that 651m$ of that cash is actually held on behalf of customers. Client cash represents amounts from customers held before release to service and product suppliers, so I think it is only the general cash that should be taken into account.

Having said that, from looking at the detail of Borrowings (note B4 to the FY19 Annual Report) I estimate that the Company currently has at least 75m$ of undrawn bank credit facilities, plus some possible extra room via credit cards, letters of credit and bank guarantees.

Anyway, looking at H1 2020 results in isolation, the split of Revenue and Costs looks approximately as follows:

Revenue: 1,555m$

Employee Costs: -822m$

Marketing Costs: -113m$

Tour Operations (Cost of Sales): -98m$

Other Expenses: -303m$

Therefore, EBITDA before Fixed Charges (Lease Costs and Net Finance Expense) amounted to 219m$ for the half year; the Fixed Charges, on the other hand, amounted to 85m$.

By way of illustration, let’s look at what would happen if Revenue dropped by -30% (or -467m$) in the second half; before any cost savings, that would equate to an EBITDA before Fixed Charges of -248m$.

But, if we (conservatively, I think) assume that:

a) Employee Cost savings of at least 10% could be achieved by rationalising the workforce (which means implementing some redundancies, but also having people go part-time and/or take leave; all these things are reportedly already happening, see link below for instance):

https://karryon.com.au/industry-news/contingency-flight-centre-travel-group-makes-immediate-changes-due-to-coronavirus/

b) Tour Operations (Cost of Sales) would decrease accordingly by ~30%.

c) Marketing Costs could be cut by at least 20%.

d) Other Expenses could be cut by at least 15%.

That would entail an aggregate cost saving by 10%*822m$+30%*98m$+20%*113m$+15%*303m$ = 180m$; therefore, EBITDA before Fixed Charges would only be negative by -248m$+180m$ = -68m$, or -68m$-85m$ = -153m$ after Fixed Charges.

Because general cash in the bank is currently 186m$, the Company would therefore be able to cover such a shortfall without even drawing additional credit facilities. Note that this does not factor in any tax benefit, or any cash inflows from cancellation fees (of which there would be a lot, I imagine, in the event of a 30% revenue drop).

While none of the above is supposed to be scientific, the point I’m trying to make is that it would require a deep and prolonged squeeze in Revenue, in order for the Company’s solvency to start getting challenged. And Management always have the option of asking shareholders to bridge them through the period of disruption without dilution by means of a rights offer, should liquidity become an issue at any point.

Based on the above, I have doubled my holding to a 2% portfolio weight today, and have still room to add should the risk/reward become even more compelling.

As always, my two cents only, and all the usual caveats apply.

Cheers