23-March-2020: AFR: Rear Window (Joe Aston): Corporate Travel has enough money... today
There can be no surer sign that a company will soon need to raise equity than when it issues a statement to the ASX saying it has “no current need to raise equity”.
Corporate Travel Management volunteered this status update on Thursday just hours after peer Webjet tried and failed to raise emergency capital – always an impossibility for a company generating net zero revenue (that goes for both companies).
Corporate Travel’s board of directors, led by Ewen Crouch (hastily departed from the Westpac board’s risk and compliance committee), insisted its “liquidity position remains strong”, so strong it postponed a $19.6 million interim dividend that had already gone ex!
“CTM is in a net cash position which means its operating cash exceeds its drawn debt, as at today. CTM has a committed debt facility of $250 million…”
The biggest red flag here is that Corporate Travel refuses to simply say how much cash it’s got, which means not very much. Riddles like these are Jamie Pherous’ speciality, but not terribly consoling for investors during a massive market slide.
Note the qualification “at today”, a conspicuously narrow point in time for the disclosure. Lucky they don’t need any emergency cash because “at today” is not an assurance that any equity capital markets banker could get very far with.
Will it have that much cash “at tomorrow”? Or “at month’s end”? Of course not. And any enterprise can amass a quick cash pile by leaving bills unpaid.
So on one day last week, Corporate Travel had enough cash to cover the balance of its primary loan, but has virtually zero incoming revenue while staring at an absolute mountain of refunds. All good then!
That same evening, the company’s house broker Morgans had a note out to its clients – the same clients it has been force-feeding this stock all the way up and over $30 a share. Analyst Belinda “Buy” Moore downgraded her price target another 25.7 per cent from $10.21 to $7.59, which was still 31 per cent north of Friday’s closing price. [meaning Friday 20th March 2020]
Moore has dutifully followed the company’s shares, from a safe distance, down their rabbit hole, downgrading to $19.40 on February 17 (closing price: $16.11), to $18.45 on February 19 (closing price: $15.97), then 44.7 per cent to $10.21 on March 13 (closing price: $9.25). Her valuation should hit 15¢ per share the same afternoon it goes to zero.
Call that a buffer? Compared to her, Morgan Stanley’s gun analyst James Bales is skiing without poles, persisting with his $27 per share valuation on Thursday with Corporate Travel closing at $4.70. Bales is something of a visionary, expecting 474 per cent upside from a travel agency while the borders are closed.
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07-May-2020: AFR (Vesna Poljak): Corporate Travel wins waiver of loan covenants for 2020
Corporate Travel Management's debt facility has been reduced by £25 million ($48 million) to £100 million, and the travel group has secured a waiver of covenants linked to the 2020 calendar year, averting a scenario that could have triggered its loans being called.
Managing director Jamie Pherous told the annual Macquarie Australia Conference on Thursday that "we have a significant portion of clients that are still travelling despite no travel". Those customers are overwhelmingly in government, healthcare, mining and critical infrastructure utilising charter flights and hotels because they are unable to get commercial flights.
"We don't suffer those negative cashflow issues that the retail industry is having," he said.
Corporate Travel rescinded earnings guidance in March but declined to update the market on what it might earn in 2019-20 on Thursday. For the month of March, its preliminary estimate of underlying EBITDA (earnings before interest, tax, depreciation and amortisation) was a loss of $3.2 million.
As part of its new loan terms, which still mature in August 2022, the company's covenants will be tested only against the January to June period of 2021 for the 2020-21 financial year.
"In that sense, we've got a $200 million facility, $30 million net cash as of today, we're burning at the lower end of the $5 million to $10 million [a month] range," Mr Pherous said.
"The good part is we can get a low break-even and return to profitability with a modest domestic recovery because the vast majority of those revenues will fall straight through to the bottom line."
However, his cost base will increase under a full recovery scenario. "But again we would manage that carefully," Mr Pherous said. Corporate Travel's interim dividend has already been deferred until October.
"We haven't got April numbers yet but we expect it to be around the lower end of that $5 [million] to $10 [million] moving forward." The stock closed at $12.08, up 8¢, and down 41.1 per cent for the year to date. [07-May-2020]
Suppliers being fair
Corporate Travel has declined to raise capital during the pandemic, whereas Flight Centre has raised $700 million and Webjet – on its second attempt – raised $346 million.
"I'm sure that some people won't survive this," Mr Pherous said of the travel industry and forthcoming acquisition opportunities.
In terms of bad debts, it has provisioned for about $10 million. The failure of Virgin Australia represents the largest exposure within that but no more than $3 million to $5 million in total. Mr Pherous said he was comfortable with that.
"Suppliers are being really fair and saying, 'we'll just agree to a fixed remuneration to get through this and we'll talk about other things at a later point'."
Mr Pherous declined to speculate on when normality returns but said he was guided by China. He was specifically encouraged by the governments of Australia and New Zealand indicating they could form a cross-border travel bubble, and potentially also in Asia where China, Hong Kong, Macau and Taiwan could be another bubble.
"People are itching to get back and travel."
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Further Reading:
https://www.afr.com/rear-window/vgi-confirmed-as-hockey-s-mystery-hedge-fund-client-20200422-p54m58
Disclosure: I do not hold any shares in CTD, FLT or WEB. Wish I'd bought some QAN at around $2 in March though...
