Ask the analyst: Can this big Covid loser scale its former heights?

Welcome to the latest edition of Ask the analyst, where I put questions from myself and readers about ASX200 companies and industries to our analysts. If you have a question, please email it to [email protected]. It may appear in a future article.

Today’s question

Today’s question came from Adam, a shareholder in Corporate Travel Management (ASX: CTD). It went something like this:

“Covid-19 was a disaster for CTD but some green shoots are now showing. What sort of market and macro condition does CTD require to get back to its former self?".

Let’s start, as always, with a quick review of Corporate Travel Management’s business.

Number four in a trillion-dollar global market

Corporate Travel Management’s name does a pretty good job of explaining what it does. Companies outsource the booking and management of their employees’ travel to CTD. This frees resources that can be focused on the client’s core business, while saving money thanks to CTD’s scale and expertise.

Corporate travel is a USD 1 trillion market and CTD is its fourth largest player. Despite that, the group’s pre-pandemic transaction volumes (the value of bookings it processed) of $12 billion gave it a tiny percentage of the overall pie.

Put simply, CTD operates in a highly fragmented industry. Despite a lot of consolidation over the years, the Global Business Travel Association estimated that the top five players in the market had a combined market share of just under 10%.

Against this backdrop, CTD’s growth strategy since 1994 has been pretty simple: it has funneled its resources towards buying up other travel management companies. Garnering this greater scale leads to better deals with travel suppliers while also boosting the company’s credibility when pitching to clients.

The Covid hammer blow

It is hard to think of many industries that were impacted by Covid-19 quite as much as corporate travel. Because while other segments of travel – like recreational trips –have recovered sharply after the pandemic, the rise of video meetings has led to concerns that business travel has entered a secular decline.

The impact of pandemic shutdowns and health concerns can be seen clearly when you look at CTD’s revenues between 2015 and 2021:

Revenues have since grown to $700m in the 2024 financial year, but how much of this can be put down to a recovery in CTM’s existing businesses is hard to pin down. After all, most of CTM’s growth has continued to come from acquisitions – most notably that of US-based Travel & Transport in 2021.

This deal was announced in September 2020, not far from the trough of sentiment towards travel businesses during Covid. And it was a big one – adding USD 2.5 billion in booking volume to the North America side of CTM’s business. This catapulted CTM into being a top five player at the time.

The T&T deal was CTM’s biggest yet, and it was funded by issuing the US $200m purchase price in new shares instead of using debt. “The deal was purely opportunistic and very on-brand in how they financed it” says Han, who estimates the deal was struck at 6-6.5 times adjusted EBITDA after his estimated synergies.

Figure 2: CTD shares outstanding as of June 30 each year. Source: Pitchbook

Can CTD recover its past glory?

As to Adam’s question on whether CTD can return to its “former self”, our analyst Brian Han says it depends what that question really means.

If Adam is asking whether Corporate Travel Management can return to its former levels of profitability (when it regularly recorded a 30%+ adjusted profit margin), Brian says it is already getting there.

If the reader is asking whether CTD can regain its old share price of $25+, though, he isn’t so sure. And Brian’s hesitancy isn’t just about the longer lasting impact of Covid on business travel.

Pressure from all sides

Travel intermediaries like CTD sit in between travel providers and the business clients booking travel. And to provide these services, they will use travel distribution systems such as those offered by companies like Amadeus and Sabre.

Even before the pandemic, Han saw CTD’s business model facing pressure from all sides of this set-up.

Travel providers, which own the inventory that CTD relies on, are consolidating and may have greater bargaining power as a result. Meanwhile, this industry is following many others in using the internet to take more of a direct-to-consumer approach as well as using intermediaries.

Bigger business clients too can make use of better technology, this time to organise travel in house rather than paying a company like CTD to do it for them. Meanwhile, the big technology platforms have reached a scale and critical importance to CTD that they too might be able to drive a harder bargain.

Brian thinks that these pressures, many of which stem from size and bargaining position versus other components of the supply chain, are behind the industry’s lust for consolidation.

This has led to a situation where acquisition targets big enough to move the needle are becoming scarce. And as the other big players in the industry are also looking to scale, CTD might have to stump up more money for the deals that it can do.

Juicy profit margins but no durable moat

Brian thinks that CTD will continue to operate with a higher level of profitability than most businesses given its capital light structure. He notes that over 70% of CTD’s operating costs are people-related, with most capital expenditure limited to investments in technology.

Whether CTD will be able to prevent competition from eventually eating into its margins and returns on capital, however, is a different question.

While a customer retention rate of 97% might hint at some switching costs for clients, Brian doubts that CTM will be able to offer a meaningfully different proposition or technology than its peers for any sustained period of time.

This could ultimately leave price as the only real differentiator and Brian doesn’t have enough confidence in CTD’s competitive position to say that its high margins and return on invested capital will persist for another decade or more.

Shares look fairly valued

While Han has some doubts about longer term margin and return sustainability, his forecast for CTD’s profitability in the medium term is notably cheerier.

He expects that CTD can continue to win market share in its fragmented industry. As the company took steps to lower its cost base during the pandemic, he expects more of revenue to flow through the bottom line as profit.

His Fair Value estimate of $16 per share factors in adjusted EBITDA margins settling at around 31% and revenue growing at an average of 6% per year over the next three.

While Han’s Fair Value estimate is marginally above the CTD’s share price today, it remains a far cry from the levels of $25+ the shares reached before the pandemic.

Got your own question about a company or industry?

Email it to [email protected]. It may appear in a future edition of Ask the analyst.

Previously on Ask the analyst: