Across client accounts that have selected the ‘Income’ Australian equity option we have purchased Flight Centre Travel Group (FLT) and Aurizon Holdings (AZJ). These purchases have been funded by the sale of Fairfax Media as previously communicated and AGL Energy (AGL) respectively.

Purchase of Flight Centre Travel Group

The company is one of the world’s largest travel agency groups consisting of more than 40 brands. We are positive on the medium-term outlook for the company for the following reasons:

• strong brand and dominant market position in adventure & package holidays, cruises and complex airfares;
• ranks amongst the world’s top corporate travel managers which is not as exposed to the online threat;
• net cash on the balance sheet, significant excess franking credits and high free cash flow yield;
• substantial investment in its omni-channel offering;
• continued strategic capital light bolt-on acquisitions or partnerships to improve geographic diversity and/or vertical integration; and
• an expanded offering which increasingly includes low cost carriers;

While near term global trading is challenging with lower airfares making it difficult to hit revenue targets required to earn higher super-overrides, FLT recognise this and are concentrating on getting a larger share of their clients spend through booking accommodation, tours, etc. The online travel segment is also highly competitive and like the Corporate segment is lower margin which places some pressure on profitability hence the company’s investment to compete in this area.

Purchase of Aurizon Holdings

The company is Australia’s largest rail freight operator while also owning, maintaining & operating one of the world’s largest export coal rail networks. We are positive on the medium-term outlook for the company for the following reasons:

• relative earnings stability from the regulated track network;
• long-term contracts for the transport of coal and iron ore;
• improved revenue certainty from the transport of coal due to increased capacity rather than usage charges in new contracts;
• materially reduced capital expenditure combined with further cost savings drive increased free cash flow to support dividends and/or share buybacks;
• the current regulatory review being undertaken will allow a better than expected return to be earned on the company’s track network.

While there is the risk that we are incorrect on the outcome of the regulatory review and in the near term both the Bulk & Freight businesses will continue to weigh on profitability given these divisions are loss making, we see the positives outlined above outweighing these risks in the medium term.

If you have any queries, please contact your Elston adviser.