Corporate Travel Management (ASX:CTD) has seen a 5-fold increase in its share price over the last 5 years. The Company reports their interim results to the market on 21 February. With the share price stalling during the last few months, what are we looking for in their next set of results in order to maintain a positive view on the Company?
Corporate Travel is a cost-effective provider of travel management solutions to the corporate market. The Company has a presence in over 70 countries and its operating business is divided into four geographically-based divisions: Australia & NZ, North America, Europe and Asia. Around 70% of Corporate Travel’s revenues are derived from offshore operations.
One of the attractive aspects of Corporate Travel’s performance in recent times has been the expansion in group margin. This is despite the headwinds of challenging trading conditions in some regions and currency movements. The Company’s business model has evolved to shifting transactions to online/automation and increasing economies of scale in order to generate higher supplier payments.
As such, the key factor underpinning the improvement in margin has been the expansion of the Company’s technology offering across its operating regions. In Australia and NZ, 80% of all client transactions are now done online. When it comes to Europe, the percentage is currently over 60%, but the real opportunity is in the North America division (which contribute around one-third of group earnings). For North America, only around 25% of all client transactions are online. Corporate Travel is therefore committed to increasing the rate towards that of the Australia & NZ and Europe divisions.
With the stock trading on a 1-year forward P/E multiple of ~25x, and not considered cheap, the market is not averse to paying for quality. The next catalyst for the share price is the interim results due on 21 February. A key focus is likely to be the progress on the expected improvement in margin as a result of the shift to online transactions.
What are we looking for in the Corporate Travel result?
1. Is Corporate Travel on track to increase margin?
Corporate Travel has a superior technology platform. The expansion and further development of its technology is enabling the Company to win business from larger (i.e. higher-margin) clients. To this end, there is scope for further market share gains. This is given that the Company’s market share in Europe and Asia is only around 1% and ~15% in Australia.
2. Is an earnings upgrade on the cards?
Corporate Travel has provided an EBITDA guidance range of $120m-$125m for FY18, which implies growth of 22.0% to 27.5% on FY17. Consensus estimates are broadly within this range. The Company has a track record of upgrading guidance and we consider that the above EBITDA guidance may be conservative. This is because it assumes:
i) Flat client activity,
ii) Flat ticket prices (despite recent evidence of rising ticket prices in 1H18 on a global scale).
On the other hand, a risk to an earnings upgrade would be due to a stronger Australian dollar against the US dollar and British Pound. On the flip side, it is worth noting that Corporate Travel’s buying power improves with strength in the Australian dollar.
The chart for Corporate Travel
The shares have been respecting an uptrend for the last few years, which is positive. They fell away sharply in November 2017 which at the time was a bit of a warning sign, but they have since been able to hold at these levels. If the interim results on 21 February are well received by the market, then we need to see the stock have a healthy close above the resistance region of $21.50. If so, then that bodes well for Corporate Travel and we would then expect it to resume the uptrend.
Michael Gable is managing director of Fairmont Equities.
Sign up to our newsletter. It comes out every week and its free!
Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.
Like this article? Share it now on Facebook and Twitter!