Corporate Travel Management: Should reward patient investors
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 06 August 2020, 3:54 PM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel
- Trading at a material discount to our valuation and on a recovery year PE of 9.6x, we upgrade our rating on Corporate Travel Management (ASX:CTM) to an Add. CTD is our key pick of the travel sector.
- CTM is well positioned to navigate the extremely challenging operating conditions the travel industry is enduring due to COVID-19. It has a low cost base, relatively capital light business model and plenty of available liquidity.
- With about 60% of its revenue generated from domestic travel across its various regions, CTD is well placed to return to profitability once markets reopen given its high online penetration (high margin work). However we recognise that investors have a patient wait and earnings may not return to FY19 levels until FY23.
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Upgrade to Add recommendation
After hitting a recent (11 June) high of A$14.60, CTD's share price has fallen 44% as COVID-19 cases have increased, borders have closed and traveller's confidence has declined.
With the stock now trading on an attractive valuation based on a recovery in earnings (FY23 PE of 9.6x), we upgrade to an Add rating but recognise that patience is required.
Key share price catalysts include reporting a stronger than expected FY20 result on 19 August (likely given recent industry feedback), borders reopen and a vaccine is found.
Risks include COVID-19 cases continue to rise and borders remain shut for longer than expected, companies reduce their travel spend in an economic downturn and continue to switch to video conferencing technology and CTD requires a capital raising.
Trading better than industry; materially reduced its cost base
As per CTD's last update, from 1 April, its revenue was tracking at the higher end of A$2-5m/month.
It was generating revenue from government (1/6 of global client base), healthcare, mining, construction, and infrastructure etc.
Importantly, CTD also continues to win and retain clients during this challenging period.
From 1 April, CTD's cost base was down to A$10-12m/month, compared to A$26-27m/month pre COVID-19 (or down 56-62%), an impressive outcome.
This means that from 1 April, CTD was losing A$5-10m/month (likely the lower end).
We think this guidance may prove conservative given our recent industry feedback suggests that corporate travel has been stronger than expected due to work from government and essential services customer contracts.
Well positioned to benefit from a domestic travel recovery
Domestic travel is resuming around the world, albeit at modest levels (stronger in China and NZ).
International travel will take longer to recover. About 60% of CTD's revenue comes from domestic travel and this is high margin work as it is largely booked online.
Given its low cost base, CTD expects a swift return to profitability even at modest levels of domestic activity.
We expect that travel demand remains relatively depressed throughout 1H21 and assume that CTD breaks even, followed by a partial recovery in demand during the 2H21 which sees the company return to profitability.
If domestic travel was to return fully in each of its markets, we think CTD is capable of generating EBITDA of greater than A$100m.
In line with the rest of our coverage, we now assume that CTD recovers back to its FY19 earnings plus the CTP acquisition (or EBITDA of A$154.5m) in FY23 (was FY22).
CTD's original FY20 EBITDA guidance was A$165-175m. We highlight that the 2H19 was a challenging period for CTD given the Hong Kong Protests, Trade Wars, Brexit uncertainty and Australian Federal Election.
We expect CTD to win market share in a weakened competitive landscape and we think that the company will have a lower cost base moving forward.
Its technology is also a competitive advantage.
Balance sheet capacity to withstand 23 months of challenges
At the start of May, CTD had net cash of A$30m.
Management said that its cash burn (including capex of A$0.5-1.0m/month) was towards the lower end of A$5-10m/month.
Our FY20 balance sheet could prove to be conservative as we are at the higher end.
CTD has a committed debt facility of A$200m (matures in August 2022). We think CTD has enough liquidity in an environment of subdued activity for at least 23 months.
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