Corporate Travel Management: COVID presents challenges and opportunities

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
31 January 2022, 8:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Corporate Travel Management (ASX:CTD) recently announced its second major acquisition during COVID with Helloworld’s (ASX:HLO) corporate travel business in ANZ for A$175m. The acquisition price appears reasonable, it meets CTD's strict investment criteria, there are material synergies on offer, it is nicely EPS accretive, and significantly scales its ANZ business while further diversifying its client base and service offering.
  • While another COVID variant has pushed out the earnings recovery and we have revised our forecasts accordingly, we know that from past experience, when it is safe to travel again and rules and regulations are eased, demand recovers quickly.
  • Following this acquisition and assuming a full recovery from COVID, we now value CTD at (login to view) per share. We believe that patient investors will be rewarded over time. Add rating maintained.

Acquisition of HLO’s corporate travel business; adds material scale to ANZ

CTD is set to acquire HLO’s corporate and entertainment travel businesses in ANZ for A$175m. The acquisition significantly scales its ANZ business while further diversifying its client base and service offering (adds new verticals). The acquisition gives CTD greater exposure to government contracts (HLO has the Federal Government, SA, NT and New Zealand government contracts) and quality bluechip clients.

A larger ANZ business means that CTD is well placed to benefit from borders reopening. The ANZ business will move from representing 17% of group revenue to 27% on an FY19 proforma basis. This region will likely become CTD’s second largest geography behind the US.

Following ACCC approval, the transaction is expected to be completed during 1Q22 (likely March). The key risks include not receiving ACCC approval and resigning HLO’s government contracts.

Reasonable purchase price; material synergies are on offer

Consideration consists of A$100m in cash to HLO (raised through a placement and SPP) and A$75m or 2.5% of CTD scrip. In our view, a material scrip component is a strong endorsement from HLO on the upside of the merged group.

Based on FY19A proforma EBITDA of A$22m, the sale price implies an EBITDA multiple of 8.0x or 5.8x post synergies of A$8m, taking EBITDA to A$30m. The acquisition is expected to be 7% EPS accretive post achieving the full synergies on an FY19 proforma basis.

Most of the synergies being staff duplication have already been completed and paid for by HLO during the downturn. Importantly, like CTD, HLO’s corporate business was EBITDA positive in the 1Q22 despite border bans given its strong exposure to essential services and government contracts.

Post COVID, CTD will be a materially larger business

Post this acquisition and after achieving the full synergies benefits, based on a full recovery from COVID, CTD is capable of generating EBITDA of A$265m (FY19 EBITDA was A$150.1m).

We see additional upside to this based on strong market share wins during COVID, further synergy benefits, structural cost savings and automation benefits from its technology.

We therefore believe CTD is capable of generating A$280m of EBITDA assuming a full recovery from COVID. 

We revise near-term forecasts for Omicron and upgrade outer years for HLO

Some of CTD’s 2Q22 and 3Q22 will be impacted by the Omicron variant which has slowed travel demand globally. When trading slows, this impacts CTD’s margins given it has rehired staff in anticipation of the recovery.

Most in the industry expect that travel demand will materially improve from March. We have consequently revised our forecasts. We continue to assume that earnings recover fully in FY24.

Investment view – Add rating

Including the HLO acquisition, our valuation increases to (login to view).

CTD remains our key pick of the travel sector. While the Omicron variant will impact short-term travel demand and push out the earnings recovery, the T&T and Helloworld acquisitions and its recent British Government contract win, mean that CTD is well positioned to be a materially larger business post COVID.

Importantly, its balance sheet remains strong and has no debt. Share price catalysts include Omicron subsidies, corporate travel demand rebounds, new material contract wins and further accretive acquisitions.

The risk to our view is if new COVID variants continue to emerge, further delaying the travel recovery.

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Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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