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Sohn: Regal’s Phil King takes on retail army with Flight Centre short pick

Jonathan Shapiro
Dec 3, 2021

Regal’s Phil King says he’s the only Australian hedge fund manager brave enough or silly enough to return to Sohn Hearts & Minds to pitch a short stock during one of the biggest bull markets of all time.

But he’s gone after a retail favourite, and reopening winner.

“There’s a saying in finance that it’s often better to travel than to arrive,” King said. That is why he’s picked retail favourite Flight Centre as a short.

The stock has surged in anticipation of the economy reopening, but King says the share price travelled to a good place long before the business got there. He doubts Flight Centre will ever return to its pre-COVID-19 glories.

King outlined five reasons why he’s shorting Flight Centre.

  1. The share price has run too far on sentiment. He compared it to Zoom, which has become a part of our everyday life but is down 60 per cent from its October 2020 peak.
  2. Flight Centre has financial challenges. The company lost more than $1 billion last year, has drawn down on debt and issued two convertible bond issues. Convertible bonds, he says, “are great for investors as they give you the upside without the downside”. In the case of Flight Centre, it means future dilution for existing shareholders if things go well – or a large refinancing task if they don’t.
  3. Flight Centre has slashed its store footprint, which will make it tougher to improve the sales to previous levels implied by its share price.
  4. There’s more pressure on one of Flight Centre’s key sources of profits: the kickbacks from airlines.
  5. The bricks-and-mortar business was already under pressure from digital competitors before COVID-19, which if anything has accelerated the shift to online commerce.

“It’s been a tough two years [and] we all need a holiday. Some of us might even use Flight Centre to book it,” King said as he signed off. “But I think the shares are a great short.”

This article was originally posted by The AFR here.

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