Corporate Travel Management will return to its former glory as the global travel industry gets back to normal after the Covid-19 pandemic, according to Rikki Bannan.
IFM Investors executive director of small caps equities says the market is simply too negative on the former darling of the Australian share market.
Founded by 1994 as a two person band, Corporate Travel Management IPO’d in 2010, and was worth $28bn in market value by 2015 - a 50-fold increase in value based on natural growth and acquisitions. During the pandemic it used its strong balance sheet to see it through.
“Covid hit this company hard, but with quick action to take a cost out, and solid balance sheet, the group emerged stronger, and unlike most of its peers, did not require a capital raising to survive,” Bannan said at the Sohn Hearts & Minds Conference.
“Instead, it created value by executing transformative M&A. Today, its earnings are 35 per cent above where they were in 2019 and that’s against a sector that has failed to fully recover.”
The company operates in the global corporate travel services sector, a highly fragmented industry that, despite only operating at 80 per cent of its pre-Covid capacity, is still worth an estimated $US1.4 trillion ($2.4trillion).
With just 1 per cent of the global market share, Corporate Travel is already a top five global operator and has industry leading margins thanks to its investment in proprietary technology and a strong focus on personalized customer service.
However, CTD’s share price has fallen from highs above $20 in January to less than $14 now.
“Why is it this fall represents such a compelling value opportunity?” Ms Bannan asked.
“Having been a consistent outperformer over most of its life, CTD has missed expectations on three separate occasions over the past 18 months, which has seen expectations rebased by some 40 per cent, an outcome we think is overly negative.”
Bannan’s analysis suggests CTD can grow its revenue at a three-year compound annual growth rate of 7 per cent and earnings by 15 per cent CAGR. But this is “relatively conservative” in light of annual growth rates that the company has historically delivered.
Her starting point is that the corporate travel services market has stabilized, and should revert to its long run, low-single digit percentage growth rate.
The company has recently been appointed to the US federal government panel and has also been named the exclusive travel services provider to the UK Government.
“CTD also has the opportunity to grow its revenue per transaction, and the key driver here is the global rollout of its proprietary hotel booking and sleep space, which aims to increase the attachment of commissionable hotels to each booking,” Bannan said.
“Assuming just a 10 per cent increase in attachment would result in $30 million of incremental revenue. Importantly, this drops all to the bottom line.
“The final piece is operating leverage…we think there’s more to come as the company continues to streamline and automate back-end processes to drive efficiency gain, in addition to the $20 million of annual savings the company has identified for over the next couple of years.”
CTD is also leveraging AI automation to improve its client facing functions.
Its virtual travel assistance scout is intercepting thousands of customer requests each week, from bookings to cancellations and general inquiries. This is improving response times and freeing up consultants to handle more complex customer requests.
“Not only should this help with client retention and new needs, but should also drive productivity through the service panel,” Bannan said.
“We think that CTD can keep its headcount relatively flat, even as it grows at the top line. What this means is that CTD can bank 55 to 65 cents of every dollar of incremental revenue regeneration.
Bannan’s forecasts don’t include a potential recovery in the corporate travel market to pre-Covid levels over the next few years, and potential market share growth for CTD.
“Past experience shows that when a merger occurs, there’s usually an abnormal level of customer churn, and we think CTD is well placed to benefit,” Bannan said.
Ticket price inflation is another potential kicker given CTD’s fee per transaction revenue model.
Incorporating these potential positives would give annual revenue growth of 8 per cent and profit growth of 20 per cent.
“This is even before we contemplate the company’s ability to deploy its balance sheet into acquisitions, which is a real life possibility,” she added.
But she acknowledges an uncertain future that could be worse than what we anticipated.
“So adding a layer of conservatism into our forecasts, there’s a bear case earnings scenario where we still see 6 per cent revenue growth and 12 per cent profit growth,” Bannan said.
“But here’s the important bit, even if this bear case were to play out, this is still above where current consensus expectations sit.
“The takeaway being that the market has simply become too negative on the earnings outlook.”
Potential for Corporate Travel to return to its former premium market valuations is the “cherry” on top of her view. The fact that the stock has de-rated to a 20 per cent discount from a 35 premium valuation that it commanded in the past is “another layer of protection.”
Applying just a market multiple to here earning scenarios yields a valuation range of $18 to $22 a share. On that basis, she sees about 40 to 60 per cent upside from current levels around $14.
“But if CTD can deliver on our earnings expectations, it would regain its reputation as a reliable double digit earnings growth story, and with this, so too, would it regain its premium valuation, making it one of the most compelling opportunities in the Australian small caps market space,” Bannan added.
View the article on the Sohn Hearts & Minds Conference website here.
This article was originally posted by The Australian here.
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