QUESTION
Flight Centre (FLT), (this is the company which we chose)
The report MUST include
Executive summary
Firm’s current credit rating – if unavailable conduct a peer analysis and estimate
Detailed analysis of all items discussed in the Report Objectives page (above) with appropriate headings
Where a particular item where information is not available make a recommendation based on comparative firm data or your own derived data – be imaginative
Sources correctly referenced
Identify and analyse potential takeover targets and/or new project opportunities plus a recommendation for a range of growth opportunities that maximise shareholder wealth.
Comprehensive conclusion with recommendations
The report must not exceed 5000 words excluding graphs and tables
The report must be concise (no waffle please), accurate, comprehensive and above all it must challenge the existing research available. It must be a frank and fearless assessment of the current (point in time) position of the firm based on recent corporate activity.
Report Objectives
You are a group of financial consultants employed by the CFO of a firm and are asked to conduct an independent and detailed analysis of its firm to seek growth opportunities that maximise shareholder wealth
(MY section)The purpose of the assessment is for your group to present detailed coverage and financial assessment of a listed company that addresses the following issues:
Introduce the firm, discuss the firm structure (including capital structure) and corporate governance, and define and analyse the main strategy of the firm. Analyse and discuss the merits of the performance incentive scheme/executive compensation scheme available to management (if not available then recommend a scheme that would satisfy the current aims of the board).
Analysis of (optimal) capital structure and debt/ equity funding.
Analyse the ways in which the firm has raised funds for new investment over the past 3 years.
Investigate and analyse the main sources of debt and equity financing in the firm including bank loans, leases, commercial paper, ordinary and convertible shares over the past 3 years.
Derive a CAPM beta for the firm. Derive a free cash flow (FCF) profile of the firm. Estimate the value of the firm using PE ratios, FCF analysis and dividend discount models.
Discuss the characteristics and decision-making parameters used by the firm’s management team for a significant project. Derive an appropriate WACC for the firm for use in NPV analysis. Determine the level of success of the project against suitable criteria. Apply real options analysis where possible.
Analyse and discuss recent merger and acquisition activity engaged by the firm. Conduct detailed analysis on a potential takeover target that would suit the firm’s strategy and recommend a plan for acquisition.
Analyse the firm’s risk management and hedging strategy and provide recommendations of actions that would improve the risk exposure of the firm. Assess the firm’s dividend policy.
SOLUTION
Flight Centre Limited
Introduction of Company:
Flight Centre Limited is a company of Australian origin with direct presence in eleven countries and indirect presence in more than seventy other countries by way of licensing agreements with local operators. It is now considered one amongst the largest travel agency company in the world, and is into more than 2000 businesses including leisure, corporate and wholesale businesses. It started operation in early 1980 and got listed in The Australian Stock Exchange in 1995.FLT has direct presence in Australia, New Zealand, the United States, Canada, the United Kingdom, South Africa, Hong Kong, India, China, Singapore and the United Arab Emirates. The company provides various travel related services to customers at economic rates. Its services include international and domestic flights and holiday packages (www.flightcentre.com.au,2012). It has around 13000 staff and more than 30 brands. It has been twice judged as the best employer in Australia and has won several other travel agent awards in its home country as well as overseas. (www.flightcentrelimited.com,2012)
Structure
The structure of the company is essentially organic, formalization and centralization is less and span of control is broad. It is simple, lean and transparent and team leaders are accessible (Robbins,2009)
FLT has a unique organic structure. The company was structured into families, villages and tribes, or in other words, into members, teams, areas, regions/countries/nations. Thus member is the smallest unit and a group of members make up a family or a team. A group of team makes up area, groups of areas make up nations and group of nations make up regions/states/countries. The family (team) has 3 to7 members; villages have 3 to seven teams; tribes (areas) have 10 to 20 teams; nations have 8 to 15 areas; regions /sates/countries have 4 and to 8 nations; and finally there is the Global Executive Team/Board. (Bhalla,1997)
The senior executives of the company have to report to the company’s board on Key Performance Indicators (KPIs) and other important aspects.
The company has a flexible and transparent work environment. Work teams need not fit themselves to rigid company procedures, policies and structures. The structure of the company being essentially organic as opposed to mechanistic can multiply and grow much easily.
(www.flightcentrelimited.com/about/our-philosophies,2012)
Corporate Structure
Presently the board of FLT comprises of four members, three members are non executive directors and one is the executive director. The non executive directors include the chairman and the Managing Director (MD) is an executive director. However, the MD is not the chairman of the board.
Corporate Governance
The Corporate Governance policies of FLT are based upon ASX Corporate Governance Principles and Recommendations.
Responsibilities of the Board:
- Protection of shareholder interests
- Formulating strategies and financial objectives.
- Monitoring and controlling risks.
- Appointment and performance appraisal of CEO,CFO and company secretary.
- Determining structure and composition of board
- Undertaking decisions related to major capital expenditures, acquisitions, capital management, acquisitions and divestitures.
- Ensuring proper and timely financial reporting.
- Incorporation and De registration of entities associated with the company.
- Promote a value system based on honesty,integrity,equity and respect
- Fulfilling Corporate Social Responsibilities.
(www.flightcentrelimited.com/about/governance/,2012)
Executive Compensation
The executive compensation policy of FLT is based on the following:
- Executive remuneration is comprised of both fixed and variable components.
- Fixed remuneration comprises of base pay, long service leave and superannuation contributions.
- Variable pay comprises of short term incentives, BOS interest (investment in unsecured business), share based compensation.
- Share based compensation is made available through Employee Share Plan, Employee Option Plan, Senior Executive Option Plan and Senior Executive Performance Rights Plan.
- Remuneration is based on performance
- Is at par with industry
- Is in consensus with shareholders.
- Transparent and based on targets
- Targets are quantifiable.
- Attuned with company long term objectives and strategies and structures.
The executive compensation plan has been formulated for encouraging performance. Executives can earn extra if they perform better by way of variable income. The company has also made available several plans for executives to earn variable income based on share based compensation. The executives can choose from plans that best fit them.(Khan,2004) The Key Performance Indicators, mentioned in above paragraph, is the basis of remuneration. The presence of fixed component helps in the sustenance and retention of staff and the variable component becomes the basis of personal growth and promotion. Hence by linking the performance of executives with the remuneration the company establishes a culture that is growth driven and competitive.
(www.flightcentrelimited.com/files/FLT-Annual-Report10-11.pdf,2012)
Financials
Capital structure (Debt/Equity)
Capital structure of a firm is an indicator of the long term solvency of a firm.The capital structure of a firm can be assessed by using the capital structure ratios.Capital structure ratios are of two types,ratios computable from the balance sheet and ratios computable from the profit and loss statement or statement of income and are also called coverage ratios.The former ratios indicate a firm’s ability to repay principal when due and the latter ratios indicate a firm’s ability to pay interests and dividends when due.(Khan& Jain,2004)
Ratios Based on the Balance Sheet
If we refer to the balance sheet given in the Annual report, May 2012, we can find out the components of Debt and Equity.
Equity will be the total equity, comprising Contributed Equity ,Reserves and Retained profits and debt will comprise Borrowings and Derivative Financial Instruments (both long term and short term)
| 2011’000 $ | 2010’000$ | 2009’000$ | ||
| A | Current Borrowings | 99174 | 93067 | 51590 |
| B | Current Financial Derivates | 4845 | 935 | 7366 |
| C(A+B) | Total Current debt | 104019 | 94002 | 58956 |
| D | Non Current Borrowings | 68601 | 84998 | 75968 |
| E | Non Current Financial Derivatives | 121 | – | 1731 |
| F(D+E) | Total Non Current debt | 68722 | 84998 | 77699 |
| G(C+F) | Total Debt | 172741 | 179000 | 136655 |
| H | Total Equity | 740616 | 710652 | 610689 |
| I | Reserves | 74741 | 43081 | 7169 |
| J(H+I) | Shareholder’s Equity | 815357 | 753733 | 617858 |
| K(J+F) | Permanent Capital | 884079 | 838731 | 695557 |
| L(K+C) | Total Assets | 988098 | 932733 | 754513 |
(www.flightcentrelimited.com/files/FLT-Annual-Report10-11.pdf,2012)and (www.flightcentrelimited.com/files/09-10-fc-annual-report.pdf)
Debt/Equity and Debt/Asset Ratios: these ratios should neither be too high nor too low.Too low a ratio implies inability to leverage debtor’s money for the benefit of owner’s/shareholders, and too high a ratio would imply greater risks to creditors.When we compare the yearly ratios with the income generated for the firm and dividend paid by the firm than we can assess these ratios, also the appropriate value of these ratios also depends upon industry/sector type, nation.
| Ratios | Formula |
Value |
Significance | Remarks | ||
| 2011 | 2010 | 2009 | ||||
| Long term D/E Ratio | Long-term debt(Non Current)/shareholder’s equity | .08 | .11 | .13 | Indicates the relative contribution of the owner’s and creditor’s of the business. Leverage of the owners on the borrowed money | |
| Total D/E Ratio | Total debt/shareholder’s equity | .21 | .24 | .22 | ||
| Debt to total capital ratio | Long term debt/Permanent Capital | .08 | .11 | .13 | Indicates proportion of long term debt in the permanent capital | |
| Debt to total assets ratio | Total debt/Total assets | .18 | .19 | .18 | Indicates the proportion of total assets financed by external money | |
| Equity/Total assets | Total Equity/Total Assets | .75 | .76 | .81 | Indicates proportion of total assets financed by owner’s capital | |
Coverage Ratio: The coverage ratio measures the ability of the firm to repay on interests, dividends. If we divide the Total Comprehensive Income by these payables then we can get an estimate of the firm’s ability to cover its payments:
The below table is constructed from data given in the income statement and cash flow statements
| 2011’000$ | 2010’0000$ | 2009’000$ | |
| Total Comprehensive Income | 107111 | 123276 | 64467 |
| Interest Paid | 32537 | 31029 | 24943 |
| Dividends paid | 79878 | 25937 | 57275 |
| Total Payable | 112415 | 56966 | 82218 |
| Coverage Ratios | |||
| Total Income/Interest Paid | 3.29 | 3.97 | 2.59 |
| Total Income/Dividends Paid | 1.3 | 4.75 | 1.12 |
| Total Income/Interst + Dividend | .95 | 2.16 | .78 |
(www.flightcentrelimited.com/files/FLT-Annual-Report10-11.pdf,2012)and (www.flightcentrelimited.com/files/09-10-fc-annual-report.pdf)
Coverage ratio should be greater than one.We can see from above table that in year 2010 the firm was adequately covered with respect to its payment due to its creditors and shareholders.(Banz,1981)
The main sources of funds are as follows:
i. Income from sale of travel services: The company provides several travel related services to its customers, for which the customers pay the company.
ii. Income from joint ventures: in order to do business in several other countries the company has entered into joint ventures with local service providers. The company can incur profit or loss out of these joint venture agreements. Profits due to sale of services are shared as per pre decided rates. Losses can be incurred on assets transferred.
iii. Rentals and sub lease rentals: the company can earn rentals from its partners or entities for extending use of its assets like machinery, land etc.
iv. Interest Income: the company can earn interest on money provided to its partners/entities.
v. Royalties: the company can have agreements with other parties that include the payment of royalty on the use of brand name/asset, in the terms and conditions.
vi. Held to Maturity investments: these are categorized under non derivative financial assets.The payments and maturity of these are fixed or determinable.
vii. Available for sale financial assets: these are available for sale non derivative financial assets that are essentially marketable securities, these can be money owed by clients/customers that are re payable on demand.
- Derivates such as foreign exchange contracts and interest rate swaps: the company has global presence and transacts business in many currencies. Fluctuations in exchange rates of currencies can result into profits and losses. To prevent losses and to maximize gain companies can opt for foreign currency hedging instruments.
ix. Borrowings: the company can borrow from banks/financial institutions .Bank borrowings can be overdrafts, working capital loans etc.(Markowitz,1952)
x. Reevaluation of previously held equity instruments: the company can invest in several equity instruments and revaluation of such instruments can result into cash flows.
Conclusion:
From the above it can be concluded regarding FLT that despite having global presence and vast businesses the company preserves the flexibility , due to its unique organic structure, motivation of founding members and leadership style. The company has a performance driven remuneration system which fosters an environment and culture of growth and achievement.The corporate structure and governance of the firm is in accordance with ASX corporate governance principles. With respect to financials; debt to equity/assets ratio is satisfactory, the firm needs to maintain a total coverage ratio greater than one.
References
About ,Flight Centre Limited. Retrieved from http://www.flightcentrelimited.com/
Flight Centre Unbeatable.Retrieved from: http://www.flightcentre.com.au/
Robbins.P.,(2009) Organization Theory:Structure,Design and Applications.India:Pearson Education.
Company Vision ,Purpose and Philosophies Retrieved from http://www.flightcentrelimited.com/about/our-philosophies/
Corporate Governance and Principles .Retrieved from http://www.flightcentrelimited.com/about/governance/
Khan M.Y.,Jain P.K.,(2004) Financial Management Text and Problems.India: Tata Mc Graw Hills
Annual Report 2011.Retrieved from http://www.flightcentrelimited.com/files/FLT-Annual-Report10-11.pdf
Annual Report 2010. Retrieved from http://www.flightcentrelimited.com/files/09-10-fc-annual-report.pdf
Bhalla,V.K.,1997. Investment Management,1st ed,New Delhi,India:S.Chand and Company Ltd.
Hermosillo B G , Hesse H .(2009), Global Market Conditions and Systemic Risk. IMF
Markowitz, Harry. 1952. “Portfolio Selection.” Journal of Finance. 7:1. pg no. 77-99.
Banz, R. Williams. 1981. “The relationship between return and market value of common stocks and import tax”. Journal of Finance.
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