For clients that have elected the “Blend” Australian equity option, we are buying Flight Centre, one of the world’s largest travel agency groups and a business consisting of more than 40 brands. It has company owned operations in 14 countries and a corporate travel management network which through licensing agreements with local operators extends to 90 countries.

In our view the company is attractively priced relative to the broader Industrials ex-Financials sector, particularly given the significant net cash position, and in the medium term should prove a compelling investment due to the following:

• a strong brand and market leading position in destination & package holidays and complex airfares allow it to benefit from increasing demand for leisure travel;

• ranks amongst the world’s top 5 corporate travel managers with the business performing well and enjoying strong growth

• return of surplus cash to shareholders;

• successful implementation of an omni-channel offering;

• strategic capital light bolt-on acquisitions or partnerships;

• an expanded offering given recent agreements with several low cost carriers;

• a strong management team with a proven track record.

As a retailer the company is vulnerable to declines in discretionary spending should we experience a period of macro-economic weakness, and near term lower international airfares will make it more challenging to hit revenue targets required to earn higher super-overrides while continued investment in the business may weigh on margins.

The purchase of Flight Centre is being funded via the sale of Perpetual whose largest revenue generating division, Perpetual Investments, has experienced no growth in funds under management (FUM) over the past 2 years. Failure to gain traction with its drive to diversify the product offering away from the very competitive large-cap Australian equities asset class raises the risk of sacrificing margin and/or increasing costs to access distribution. Given trading volumes, the sale may be executed over more than a single trading day to avoid unnecessarily impacting the price.

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