Investors have gone mad for this prominent travel agency, but is it already a value trap even before we’ve moved past COVID-19?
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The travel industry was pretty much forced to shut down this year in response to the COVID-19 pandemic.
But now as interstate borders reopen and possible vaccines offer hope for future international trips, share prices for the sector are starting to look up.
But two fund managers have warned there is one prominent ASX travel stock that is already a potential value trap.
Flight Centre Travel Group Ltd (ASX: FLT) has flown from $11.26 at the end of October to now $17.90 – an almost 60% climb in just 5 weeks.
It’s thus already overvalued, said NAOS Asset Management Limited portfolio manager Ben Rundle.
“What investors are missing with Flight Centre is that the majority of their earnings actually come from the corporate side of the business,” he told Livewire.
“That corporate market, I don’t think is going to recover as quickly as everyone thinks. While the leisure market might be full when everyone’s piling into airports to go on holidays, I think they’re overestimating the benefit that Flight Centre will get from that.”
Flight Centre has raised a lot of cash and closed a lot of stores
In its 2020 financial year results, Flight Centre revealed it had a cost base of $230 million per month. The company was forced to raise $900 million in April to stay alive then issued $400 million in convertible notes last month.
Flight Centre has also closed 408 retail stores this year, leaving just 332 to recoup the losses.
Forager Australian Shares Fund (ASX: FOR) chief investment officer Steve Johnson said Flight Centre’s current price already has recovery built-in.
“The bull case might be, ‘Well, as this business recovers, all of that working capital comes back into the business and you can give the cash back to shareholders’,” he told Livewire.
“I don’t mind the business. I think it’s got some long-term issues, but again, I think the share price is fully pricing in the recovery that is going to come.”
Other travel shares also rallied in November on the back of favourable conditions. Webjet Limited (ASX: WEB) has risen 65% since the end of October, Qantas Airways Limited (ASX: QAN) is up 31%, and Corporate Travel Management Ltd (ASX: CTD) is 32% higher.
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Motley Fool contributor Tony Yoo owns shares of Corporate Travel Management Limited, Qantas Airways Limited, and Webjet Ltd. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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