Corporate Travel Now Truly Global

This story features CORPORATE TRAVEL MANAGEMENT LIMITED. For more info SHARE ANALYSIS: CTD

-Earnings estimates lifted
-Operating leverage enhanced
-Strong growth profile for corporate
 

By Eva Brocklehurst

Corporate Travel Management ((CTD)) has substantially expanded its footprint and expects sales momentum to improve significantly as a result. The company has acquired Diplomat Travel, a US business, and Chambers Travel, a UK/Europe business, for an aggregate $83.4m in cash and scrip over three years. The US acquisition adds scale in an existing market while the European acquisition diversifies the company's earnings base.

Macquarie is confident the earnings margins in the UK/European business should increase over time as scale efficiencies are achieved, noting North American margin expansion of around 350 basis points in FY14 is an example of the company's operating leverage over a relatively fixed cost base. The acquisition costs look large for a company the size of Corporate Travel but as Macquarie highlights, with increased scale comes greater negotiating power with suppliers and improved support from airlines and package suppliers. Integration risks remain but Macquarie is confident that having worked with Chambers Travel previously, Corporate Travel will make the grade. Brokers also observe key personnel will continue in their roles.

The company will undertake a fully underwritten 2-for-35 renounceable entitlement offer at $8.80 to raise $45.5m to partly fund the acquisitions and the board has also subsequently upgraded earnings guidance to above $45m from above $41m for FY15, assuming a 6-month contribution from these acquisitions of $4m.

Macquarie believes the company is well placed to penetrate further markets offshore via acquisitions and expand its existing business, but does not expect further acquisitions in the near term. The broker considers the medium term outlook may be strong but the majority of this is captured in the current share price and, hence, a Neutral rating is warranted. Macquarie's price target is raised to $10.00 from $8.50. Morgan Stanley observes the stock is not cheap, although lauds its track record of execution and the fact that organic growth has provided two successive positive earnings revisions. The acquisitions represent another earnings catalyst and also imply the valuation is not as demanding as it first appears.

Morgan Stanley assumes few synergies and modest growth from current run rates but, in combination with improved existing business, lifts earnings estimates by 12-13% for FY15-16. The broker also observes that corporate travel is the segment which is least susceptible to online challenges and has the strongest growth profile. Moreover, any cyclical recovery could provide Corporate Travel with significant operating leverage. Morgan Stanley also expects more clarity on systems implementation and integration in 2015. The broker's base case shifts closer to the bull scenario, which calls for further industry consolidation and strong execution, and an Overweight rating is retained. Target is upgraded to $12.20 from $8.80.

In the four years since listing, Morgans observes Corporate Travel has now delivered on its global footprint ambitions, expanding into Europe and increasing scale on the US east coast where it was previously under represented. Morgans believes the company can now win more global contracts and this will underpin strong earnings growth for many years to come. The purchase price is attractive and there are incentives for management to grow the business strongly. This deserves an upgrade to Add and the broker recommends shareholders take up their entitlements. Target is revised up to $11.20 from $8.95.

The price paid is also justified, in JP Morgan's view, as it makes Corporate Travel a truly global player. Other strategic benefits include IT platforms and sector exposure with the ability, via Chambers, to service clients in 10 European languages. Diplomat is based in Washington DC, providing the company with exposure to government, defence and security service clients. JP Morgan retains an Overweight rating and raises the target to $10.60 from $9.00.

Corporate Travel now operates in 46 cities and 23 countries and can boast 24-hour support coverage. Chambers Travel is a long established business in eight European countries and provides cross selling opportunities for key clients that travel globally. Diplomat extends Corporate Travel's reach to 18 US cities and eight states. The business focuses on the high value travel market, with two in every three tickets purchases for international travel. Macquarie notes Diplomat's FY15 earnings contribution will reflect the loss of key major government contract, because the client required a global travel partner located in multiple regions.

FNArena's database has three Buy and one Hold rating for CTD. Consensus target price is $11.00, suggesting 6.1% upside to the last share price. This compares with $8.77 ahead of the acquisition announcement.
 

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