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Start A Growth Travel With Corporate Travel Management – Corporate Travel Management Limited (OTCMKTS:CTMLF)

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Corporate Travel Management (OTCPK:CTMLF, ASX: CTD) (“CTM”) is not widely known among investors in the US. I hope to illustrate why this example of splendid entrepreneurship is worth a spot in one’s long-term portfolio, especially at given prices during the period of weakness the company is enduring. Founded in Brisbane, Australia, in 1994, Corporate Travel Management started as a small B2B travel company, and now it is one of the major dynamic powers in Australia and New Zealand corporate travel services with a growing presence in Europe, United States, and Asia. The business offers a very robust growth rate between 20% and 30%, strong financial health, an ambitious strategic approach and technology that does a very good job optimizing its clients’ travel expenditures.

Introduction

For many companies, travel expenditures represent the second-highest expense, exceeded only by salary and benefits. These expenses include airline, rail, hotel, car rental, ferry/boat, staff and client meals, taxi fares, gratuities, client gifts, supplies, etc. The management of these costs is usually handled by Corporate Travel Management.

The company should not be confused with the work of a traditional travel agency. CTM decides on the class of service which employees are allowed to fly, negotiates corporate fares/rates with airlines and hotels and determines how corporate credit cards are to be used. The agency, on the other hand, makes the actual reservation within the parameters given by the corporation.

This buoyant business has been very successful at its home market and has the ambition to be a global corporate travel company. It has established itself over recent years in all major geographies.

(Source: CTM Investor Presentation)

Expanding abroad is a risky venture, and we have to examine how successful it has been so far. CTM rapidly expanded overseas during the last 3 years. Here is a geographic distribution of the company’s sales:

(Source: Company’s financial reports)

(Source: Company’s financial reports)

The expansion has been very successful so far, and CTM is not a small, regional growth company anymore. In fact, North America now is the company’s largest engine. The approach is effective and keeps the business going great guns.

What powers the business?

In my opinion, there are several key components of CTM’s story:

  • The company obviously knows how to serve clients. That is why it continues to win awards, for example “Best National Travel Management Company in Australia” for the 13th time in 2019, “Best Travel Management Company” (more than £200 million) in the UK for the 1st time in 2019, and there are many different awards. Some of them, like mentioned above, are significant.
  • CTM provides highly customized travel management solutions that drive savings and increase efficiency for businesses. The company built its own CTM SMART Technology, which enables finding a balance between costs, clients’ high expectations, and time efficiency.
  • I personally like the company’s ethics – it can lead the group very far. These include – Exceed to Service: Excellence is a habit, not an act; Trust to Succeed: Belief is what makes a person, team, company, and community stronger; Innovate to Generate: Innovation in thinking and doing what nobody else does; Empowered to Achieve: The power to make the right decision to achieve great results.
  • The business developed a very careful system of buying to expand.

(Source: Company’s financial reports)

  • Pherous Jamie, the founder of the business, continues to hold around 20% of the shares outstanding, only 1% less than 3 years ago. Mr. Pherous is in his fifties, a very tender age for a good entrepreneur, and I believe his leadership will benefit the growth story of the business. He founded Corporate Travel Management in 1994 with just two staff in a small Brisbane office, after all.

Growth profile and current issues

(Source: Bloomberg)

The business is showing vigorous growth that sometimes goes through periods of weakness.

(Source: Company’s financial reports)

A very important point in a time of the modern “growth at all costs” paradigm, the company is profitable, pays dividends, sees the cash it generates and improves its efficiency.

(Source: Company’s financial reports)

Why does the growth rate weaken? A couple of reasons:

  • Travel activity was affected by continuing Brexit uncertainty in the UK, continuing tension from US/China trade talks and ongoing civil unrest in Hong Kong.
  • China, Australia, and New Zealand’s economies have seen better times than now.

Keeping in mind the hope that these problems are temporary, we can assume a continuation of growth in 2020 and beyond.

Financial health, some value checkpoints, and competition

CTM’s assets will not surprise you: some cash, averaging at 10% to total assets, accounts receivable around 30% (“Trade and client receivables” – non-interest bearing and are generally on terms ranging from 7 to 30 days) to total assets, and tons of intangible assets over 50% (Goodwill, of course), since the company prefers to expand by buying businesses rather than by building a presence in other geographies from scratch. Certainly, that Goodwill over 450 million AUD will play a bad joke with the company somewhere in the future.

The current ratio isn’t that great, always between 1.1 and 1.3. But the bright spot is the debt-to-assets ratio.

(Source: Company’s financial reports)

Unfortunately, CTM fails at this value metric. Management uses shares as money when acquiring businesses. Potentially, in any given year, they can delude in the range of 5-10%. In 2014 they made SPO, adding another +15% of shares outstanding. In 2018 and 2019, the number of shares outstanding grew +0.85% and +2.25%, respectively.

A brief chronology of recent acquisitions:

(2018)

  • Acquired 75.1% of Lotus Travel Group, an Asian-based travel management company, for $39.93 million in cash.
  • Acquired 100% of SCT Travel Group Pty, trading as Platinum Travel Corporation (New South Wales, Australia). Paid cash $3 million and shares $2.3 million, with further contingent consideration payable of $3,232,000.

(2017)

  • Acquired 100% Arizonaco Ltd. and Portall Travel Ltd. trading as Redfern Travel (Bradford, UK). The initial cost of the acquisition was $68.39 million, paid in both cash $53.17 and shares $15.2, with further contingent consideration payable as set out in this note. The total acquisition date fair value consideration was $87.4 approx.
  • Acquired 100% of Andrew Jones Travel, HQ in Tasmania. Cash $4.62 and shares $1.145.

(2016)

  • 100% Travizon, Inc. HQ in Boston, MA. Cash paid $14.075 and shares $17.8, with further deferred consideration payable on September 29, 2017.

As a minor point, we can observe how Corporate Travel Management grew its sales in comparison to its Australian peers. Flight Center Travel Group (OTC:FGETF) is a major Australian travel company, and lack of growth is a problem of a mature company. The main rival is Webjet (OTCPK:WEBJF), but the financial health of this rival is far from perfect.

(Source: Bloomberg)

Investment thesis

DCF model generates a range of fair prices between 13 AUD and 18 AUD, depending on the growth rate between 17% and 25%. The stock is trading on the ASX between 17.5 AUD and 19 AUD.

I don’t think DCF is always the case for growth companies. Sometimes I prefer to use average P/S or even lowest 30% percentile. The average P/S is 6.33 and the 30 percentile is 5.78. And we are now well below those cautious levels. I suggest establishing a long-term (3-5 years) position in CTM at 18-19 AUD, averaging it lower if the chance arises, with potential annualized gain between 15% and 20% in AUD. The total position shouldn’t be larger than 10%.

Don’t forget about the dividend yield of 2%. You may choose to take it in stocks, thus avoiding taxes.

(Source: Bloomberg)

Risks

I think the weak spot of this investment is management’s abuse of power of issuing new shares when acquiring businesses. It can backfire out of the blue.

Another factor is that CTM has acquired a number of businesses, all of which have resulted in the creation of significant intangible assets. That Goodwill can be written off in any bad year.

Disclosure: I am/we are long CTMLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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