Shares in Corporate Travel Management (ASX:CTD) have retreated from its peak from 12 months ago as the timeframe for an anticipated recovery in revenue back to pre-COVID levels has consistently been pushed back. The Company itself over-invested for a recovery in US travel that never eventuated. This resulted in margin pressure in the recent interim results. Following weakness in the shares after the release of its interim results in February, we recently researched CTD in The Dynamic Investor to assess whether any recovery in the shares is likely to be sustainable.
Overview of Corporate Travel Management
Corporate Travel Management provides cost-effective travel management solutions to the corporate market. Revenue is earned via fees for service, commissions and volume incentives. The Company’s online booking tools mean the business is highly scalable and allows it to generate strong margins. CTD services clients in more than 70 countries and has four reporting segments based on geographical exposure: Australia & NZ (ANZ), North America, Asia and Europe.
Key Fundamental Drivers
Short-Term Earnings Recovery
The Company expect earnings in FY24 to fully recover back to pre-COVID levels, however this is dependent on several factors:
i. CTD expect material 2H23 acceleration across every segment, pointing to strong demand with “no signs of macroeconomic impact on recovery”.
ii. China’s reopening in early January 2023 is expected to enable recovery of international supply and competition, with a “significantly stronger 2H23” expected due to momentum from client wins, synergies from the acquisition of Helloworld’s corporate business and productivity gains.
iii. Ability to generate further client wins. CTD expect the Europe segment to be the largest contributor to EBITDA in 2H23, reflecting the scale through contract wins secured during the COVID shutdown period. The Company also noted that client win pipelines are “at all-time highs” with +97% client retention.
Underperformance in North American Segment Likely to Continue
The North America segment stood out as an underperforming region at the 1H23 results release. Revenue recovery of 73% in 1H23 (in volume terms) is below market data and in line with their larger peer American Express Global Business Travel. In contrast, the revenue recovery rate for the ANZ and Europe segments (as per the 1H23 results presentation) was ~78% and 146%, respectively.
With client wins adding to CTD’s pipeline (the North America segment continues to lead client wins across the group operations) and focus on Small-to-Medium Enterprises (SMEs), the rate of revenue recovery ought to match that of ANZ or Europe. This means that the underperformance is likely as a result of the North America segment either losing clients or existing/new clients spending well below their pre-COVID-19 average. Further, competition in the SME segment is fierce. Global travel management companies are aiming to increase presence in the SME segment, where CTD has traditionally been strong.
One positive for the segment is that with staffing levels now largely rebuilt, CTD expects significantly higher EBITDA margin on incremental revenue recovery. Revenue recovery is expected to surpass 80% in 2H23, with the Company targeting 30% EBITDA margin for the North America segment at 100% revenue recovery. When adjusting for the investment in excess staffing capacity, the underlying EBITDA margin in 1H23 was 15.7%.
Balance Sheet Strength to Participate in Industry Consolidation
The balance sheet has traditionally been in net cash position, however there was a deterioration in balance sheet strength within 1H23, with the cash balance declining and no debt on the balance sheet. The decline in the net cash balance largely reflects the negative working capital impact during the period. The soft cash conversion of EBITDA in 1H23 was due to the timing of airline (supplier) payments. However, the Company has pointed to improvement in cash conversion in 2H23, as working capital balances are now near full recovery levels.
CTD confirmed confidence in the longer-term profile of cash conversion normalising at 90%. This supports expectations for the balance sheet to remain in a net cash position over FY23-25. This factor, coupled with the $100m undrawn debt facility, positions the Company well to pursue further acquisitions. Corporate travel is a huge and fragmented sector, with further industry consolidation expected. CTD is the 4th largest corporate travel brand in the world, yet manages under 1% of the global market, where CTD’s market share in Australia & NZ is comparatively higher, at ~20%.
Fundamental View
CTD shares are currently trading on a 1-year forward P/E multiple of ~20x. This is at the lower end of the trading range over the last two years (18x – 28x). Whilst the current multiple is attractive in the context of an EPS growth profile of ~37% over FY23-25 on a CAGR basis, we consider that a more favourable view on CTD would require a high level of confidence that the Company can: i) Achieve its FY23 guidance on an unusually large 2nd half skew and ii) Generate a greater degree of operating leverage in FY24, which assumes nearly a full revenue recovery for the North America segment.
The biggest investment risk is continued under-performance of the North America segment, as this is partially structural. Accordingly, we would prefer to see evidence of an improvement in margin for the North America segment before taking a more favourable view on the shares.
Charting View
CTD remains in a downtrend since its peak from April 2022. However, the one potential positive is that price action from October could be resembling an inverse head and shoulders. For that to occur, we would need to see an upside break above $19. Only then could we get bullish on the chart.
Michael Gable is managing director of Fairmont Equities.
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