Analysis by Dominic Rose, Montgomery Group
WHY WE THINK CORPORATE TRAVEL MANAGEMENT’S RECENT ACQUISITION IS A GAME CHANGER
Corporate Travel Management (ASX:CTD) announced last week the US$200 million acquisition of US-based Travel & Transport (T&T) which transforms the company’s North American business and positions the company as the global leader in mid-market corporate travel services.
COVID-19 continues to adversely impact the sector and this highly strategic deal reinforces our view that CTD remains best placed to leverage its technology advantaged business model, taking share and consolidating the large and fragmented global corporate travel market. We also see a potential vaccine as a major catalyst for a sector recovery and like the balance sheet optionality with CTD having raised excess capital should further value accretive opportunities arise.
Key transaction details are as follows:
The deal rationale appears strategically sound to us; the acquisition adds material scale, is highly complementary to CTD’s existing North American business, brings a substantial synergy pack with upside from technology consolidation, and includes a leading corporate hotel program (Radius) which CTD can offer across its client base, further enhancing the value proposition.
The acquisition positions CTD as the global leader in the mid-market segment and the 5th largest corporate travel service provider worldwide with a combined TTV of around A$10.8 billion based on pro-forma CY19 data, an increase of approximately 60 per cent. CTD was previously number seven with T&T number nine.
T&T adds strength to the management team with its senior executives staying on to lead the combined North American business (key management will participate in CTD’s long term incentive plan). This highlights CTD’s high regard for the business and its leadership.
The customer mix is highly complementary with T&T focused on professional services and healthcare clients (60 per cent), sectors CTD was underweight. Geographic exposure is broadened, adding T&T’s big base of clients based in New York and throughout the East Coast to CTD’s mainly West Coast presence.
Despite the strong rally in the share price, we think valuation remains attractive with the stock trading on sub 10x pre-COVID EBITDA ($240 million CY19 pro-forma basis incorporating T&T and synergies). Considering CTD historically traded on 15-20x EBITDA, the market appears to be discounting a significant and enduring impairment to the business’ earnings capacity (33-50 per cent). Although we acknowledge uncertainty around the pace of a potential recovery, pent-up demand is strong which suggests upside surprise potential when barriers are eventually removed. Furthermore, CTD is poised to gain meaningful market share from weakened competitors while the reset cost base also means less revenues are required to generate equivalent earnings.
The Montgomery Small Companies Fund owns shares in Corporate Travel Management. This article was prepared 06 October with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Corporate Travel Management you should seek financial advice.