Acquisition of Lotus Travel Group Limited
On the 2nd of October 2018, Corporate Travel Management (CTD) will acquire 75.1% of Lotus and its Asian partner, Ever Prestige Investments, will acquire the remaining 24.9%. The acquisition provides the company with its targeted level of scale and will make CTD the largest player in Hong Kong serving the Greater China market. The combined businesses will have a Total Transaction Value (TTV) approaching A$2.5bn and CTD's market share in the Asian corporate travel market will increase to over 2% from over 1% currently. As a result, CTD should have greater buying power and will be in a position to optimise global supplier revenue and support costs.
CTD intends to overlay its technology and business systems to increase the efficiency of Lotus and its people.
We upgrade our forecasts
The base consideration for Lotus is 10x CY17 EBITDA of A$5m. Lotus' CY17 earnings were negatively impacted by the declining ticket prices. We understand that its normalised EBITDA is approximately A$7.5m. Relative to CTD, Lotus has a low EBITDA to TTV margin despite the similarity of the businesses (0.5% vs 1.3% for CTD). Applying CTD's margin to Lotus' TTV of A$1.0bn would equate to EBITDA of just over A$13m, without assuming any growth in TTV.
CTD's 75.1% share of the acquisition (approx. A$37.6m) will be funded by the recent share placement.
Our FY18 forecast is largely unchanged as we were already slightly ahead of guidance. However our FY19 and FY20 EBITDA forecasts have risen by 2.7% and 7.2% respectively for the Lotus acquisition and by adding the expected margin improvement from the US and Asian tech hubs in FY20.
While the acquisition is only marginally earnings per share accretive in the short term, we see more material benefits taking a medium term view.
While Lotus is not a large acquisition it is strategically important, providing the Asian business with the necessary scale and a strong earnings growth profile over the next few years. We note that CTD's first acquisition in Asia, Westminster Travel, has gone extremely well.
Share price catalysts include a strong FY18 result, upbeat outlook commentary and further accretive acquisitions. Corporate Travel continues to evaluate opportunities in both North America and Europe to increase the scale of its existing businesses to its desired level.
Following forecast changes and rolling forward to FY20 to take into account the first full year of the Lotus acquisition and the benefits of the tech hubs in Asia and the US, we increase our DCF valuation and share price target (Morgans clients can login to view).
We retain our Add recommendation.
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Disclaimer(s): Morgans Corporate Limited was Lead Manager to the placement of shares in Corporate Travel Management Limited Limited and received fees in this regard.
Analyst owns shares.
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