Flight Centre Travel Group Limited (ASX:FLT) Shares Could Be 35% Below Their Intrinsic Value Estimate

Yahoo

18-03-2025

The projected fair value for Flight Centre Travel Group is AU$21.64 based on 2 Stage Free Cash Flow to Equity
Current share price of AU$14.09 suggests Flight Centre Travel Group is potentially 35% undervalued
The AU$19.81 analyst price target for FLT is 8.5% less than our estimate of fair value
How far off is Flight Centre Travel Group Limited (ASX:FLT) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Flight Centre Travel Group
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (A$, Millions)
AU$286.8m
AU$390.2m
AU$462.2m
AU$342.3m
AU$319.8m
AU$308.4m
AU$303.3m
AU$302.2m
AU$303.9m
AU$307.7m
Growth Rate Estimate Source
Analyst x6
Analyst x6
Analyst x5
Analyst x2
Analyst x1
Est @ -3.56%
Est @ -1.67%
Est @ -0.35%
Est @ 0.58%
Est @ 1.23%
Present Value (A$, Millions) Discounted @ 8.3%
AU$265
AU$333
AU$364
AU$249
AU$214
AU$191
AU$173
AU$159
AU$148
AU$138
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$2.2b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 2.7%. We discount the terminal cash flows to today's value at a cost of equity of 8.3%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$308m× (1 + 2.7%) ÷ (8.3%– 2.7%) = AU$5.7b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$5.7b÷ ( 1 + 8.3%)10= AU$2.5b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$4.8b. 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$14.1, the company appears quite undervalued at a 35% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
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 8.3%, which is based on a levered beta of 1.289. 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.
Strength
Debt is not viewed as a risk.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
Opportunity
Annual earnings are forecast to grow faster than the Australian market.
Good value based on P/E ratio and estimated fair value.
Threat
Dividends are not covered by cash flow.
Revenue is forecast to grow slower than 20% per year.
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Flight Centre Travel Group, there are three essential elements you should look at:
Risks: For instance, we've identified 2 warning signs for Flight Centre Travel Group that 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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.