Flight Centre kicks off $180m capital raising to enter luxury US and UK travel market

Flight Centre (ASX: FLT) will tap the market for $180m to help fund the acquisition of Scott Dunn, a high-end travel and tours company based in the UK.

"Scott Dunn provides an entry point into the UK and US luxury travel market through a well-regarded, scalable brand which will be supported by Flight Centre's global platform," the company said in a statement.

Transaction Overview

• Price: £121m (A$221)

• Valuation: 9.6 times EV (12 months to 30 June 2023 EBITDA)

• Earnings: TTV of £122m (A$199m) and revenue of £29m (A$51m) for the 12 months to 31 December 2022

• Timing: Expected to take place prior the end of February 2023

• Financial impact: Increases Flight Centre's luxury margin by approximately 3% and EBITDA margin by approximately 7% (pro-forma 6 month to 31 December 2022 basis)

• Earnings impact: Expected to be mid-teens percentage EPS accretive prior to the realisation of any synergies and one-off transaction costs

Capital Raising Overview

• Raise amount: $180m

• Raise price: $14.60 per share

• Discount: 7.8% to last traded price of $15.83

• Dilution: Placement will issue 12.3m new shares or 6.2% of existing shares on issue

• Share purchase plan: Up to $40m at the same price as above

1H23 Trading Update

A trading update accompanied the acquisition and capital raising announcement.

Flight Centre said total transaction volumes (TTV) for the first half of FY23 had more than tripled compared to the prior period and only marginally behind the entirety of FY22.

The company expects first half TTV to be around $9.89bn, up from $3.26bn a year ago but still tracking below FY19 levels of $11.2bn.

Some other key comments from the trading update include:

• Corporate: "Outpacing industry recovery with record 1H23 TTV and on track to deliver record FY23 TTV."

• Leisure: "Strong recovery in TTV compared to 1H22 as normal travel patterns resume."

• Leisure margins: "... a shift in business mix is impacting overall Leisure revenue margins. Growth in lower revenue and cost margin businesses ..."

• Pent-up demand: "Considerable pent-up demand yet to flow through in leisure in particular."

• Airline capacity: "Airline capacity was ~70% of pre-COVID levels in December 2022 in Australia and ~80% internationally."

For FY23, Flight Centre said its targeting $250m to $280m in underlying EBITDA (excl acquisition contribution) compared to a -$183m loss in FY22 and -$337.8m in FY21. The guidance comes largely ahead of StreetAccount consensus expectations of $259.5m.

Broker views

UBS is the only broker to have provided a note for Flight Centre shares in 2023.

The investment bank is Neutral rated with a $17.00 target price. The 25 January note observed a mixed narrative for travel with a plateauing recovery in the US, optimism for China's reopening and labour headwinds for domestic leisure.