Income Report / Income Report: The Bull Case for Flight Centre (CBA, ANZ, FLT)

By Market Matters 17 July 19

Income Report: The Bull Case for Flight Centre (CBA, ANZ, FLT)

Market Matters Income Report 17th July 2019

The market has been soft over the past week, edging lower on light volumes, however some decent buying into early weakness this morning is encouraging. At a stock level, BHP has followed RIO yesterday announcing FY19 & June quarter production numbers.Petroleum the stand out topping guidance and market expectations. Iron ore in line with revised guidance – as was for RIO yesterday – as well as copper although the latter was a tad below market expectations. Coal segment FY19 numbers softer than guidance on weather and processing yields.

More on this in the PM Note however both BHP and RIO  have not delivered overwhelmingly favourable production and sales scorecards for JQ/FY19. Both have faced an array of operational and weather issues – all things that go hand in hand with mining – and both are struggling to deliver sustainable growth (measured in copper equivalent units). Shares in BHP are trading +1% higher at $41.59.

Currently, the ASX 200 is trading up +14pts or +0.22% to 6655.

ASX 200 Chart

The Income Portfolio had a soft week, falling -0.10% against a backdrop of a weaker share market.  Performance was dragged by Perpetual (PPT) which fell substantially over the past 2 sessions, off over 9% for the week. Gains from CSR and Genworth (GMA) helped support the portfolio, while no dividends were paid in the week. The portfolio continues to outperform its benchmark of RBA + 4% for the first few weeks of the financial year, adding 0.51% thus far vs the benchmark at 0.21%. Since inception the portfolio is up 16.87% vs the benchmark of 11.13%.

For those interested in investing for income in a low rate environment, Market Markets does run an Separately Managed Account (SMA) which is open for investment. The portfolio is based on the MM Income Portfolio below. The SMA has now passed its first anniversary and performance has remained sound printing an overall gain of 10.16% for the year to June 30. The June update can be viewed - Click Here.

1 Switch from CBA into ANZ

While CBA is a better bank, we doubt it’s ~40% better than ANZ as the relative P/E’s imply (see below table).  This switch is more about adding value as opposed to being defensive and it’s likely  to be unpopular with many readers. However the below chart shows the relative value elastic band is being stretched, especially after CBA traded ex-dividend in February – over the last 3-months CBA is up +11.5% while ANZ  has only gained +2.2%.

The peer group metrics below shows CBA trading on a 20% P/E premium to its historical average while ANZ is trading at an 11% discount.

Source: Bloomberg

Their respective forecast yields are also widening with CBA ~5% and ANZ ~6%, both obviously fully franked. ANZ has more exposure to business banking which is improving while CBA has hung its hat more on the retail customer which is still struggling under the weight of household debt. ANZ does have a lower return on capital than CBA due to its failed Asian expansion, however that influence will decline rather than expand over the coming years.  

By switching, from CBA into ANZ, the yield differential increases by more than 1% pa while ANZ should be supported from a relative value standpoint from current levels.  We are switching from CBA into ANZ in the MM Income Portfolio.

CBA v ANZ Chart

2 The Bull Case for Flight Centre (FLT) $43.70

The well-known travel business has had a tough 12 months trading from ~$70 to a 2019 low below ~$39.  The most recent hit came on an earnings downgrade at the end of April and the stock fell sharply. It was a poor update following a poor period of sales, however the obvious question  is to what extent did the election have on consumer appetite to book travel? FLT’s customer base is skewed primarily to the demographic that were likely to lose income if Labor’s proposed changes to franking credit legislation got up. Uncertainty often breeds inactivity and that was shown in the downgrade.

Flight Centre (FLT) Chart

At MM, we share a similar customer demographic to FLT and the election had an impact on our business, however we’ve seen a sharp post-election rebound - we’re betting that FLT has seen something similar, or at least some green shoots to underpin more upbeat commentary for FY20  when they report on the 22nd August (they don’t typically provide guidance).  FLT is currently on an Est P/E of 16x relative to downgraded earnings, however when this is adjusted for the  ~$300m in cash on the company’s balance sheet the P/E looks closer to 15x and an expected yield of 4.42% fully franked, FLT looks interesting. We recently added FLT to the MM Income Portfolio.

Yesterday I sat down with Darren Vincent, Shaw & Partners Analyst in FLT for his take on the business. While we’ve recently added FLT into Market Matters Income Portfolio, we have a 3% weighting leaving room to add to the position post the August result.

Video update – click here

3 Axsesstoday (AXLHA) update

The MM Income Portfolio holds AXLHA, the simple bond issued by finance business Axcesstoday, which appointed voluntary administrators earlier in the year. A sale process has been ongoing with a number of parties involved. As per the announcement below, the administrators are now dealing with one destressed debt specialist under an exclusivity agreement. We are hopeful that a deal will prevail where bond holders are paid out.

Announcement 2nd July 2019

As previously announced, the Voluntary Administrators of Axsesstoday Limited (Administrators Appointed) (ASX:AXL) (AXL) received a number of non-binding indicative offers from interested parties relating to a sale or recapitalisation of AXL and certain of its subsidiaries (Group). Following a review of those offers, the Voluntary Administrators have yesterday entered into an exclusivity arrangement with an affiliate of Cerberus Capital Management, L.P. (Cerberus). The exclusivity period is until 8 July 2019, and may be automatically extended until 31 August 2019 if certain conditions are satisfied or waived. During the exclusivity period, the Voluntary Administrators intend to finalise terms on which Cerberus proposes to acquire all of the assets of AXL by way of a deed of company arrangement (DOCA). The Voluntary Administrators will work together with Cerberus to negotiate and finalise the DOCA within the Exclusivity Period. If a DOCA is finalised and agreed, the terms of the DOCA will be presented to creditors of the Group for their approval at the second meeting of creditors.


We plan to switch from CBA into ANZ  **watch for alerts**
We remain keen on Flight Centre (FLT) at current levels, although they need a decent report this August to help regain market confidence

Have a great day!

James, Harry  & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 17/07/2019

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