Travel businesses were some of the biggest casualties of the global pandemic. Many were dealt a near fatal blow by government restrictions and the closing of State and international borders. So it’s logical to assume they could also bounce back strongly once travel restrictions are lifted. To me, one business stands out from the pack.

Although economies around the world have gradually reopened, travel activity remains deeply depressed, constrained by residual barriers (quarantine measures and limited airline capacity etc), ongoing COVID-19 concerns and general macro uncertainty.

Looking ahead, we do see cause for optimism, supported by promising vaccine prospects and robust pent-up demand. Travel offers particularly strong leverage to an opening back up scenario. After carefully screening the opportunity set, the Montgomery Small Companies Fund identified Corporate Travel Management (ASX:CTD) as an interesting travel recovery play and a business likely to emerge from the pandemic in a much stronger competitive position, enabling it to take further market share and consequently outperform on the way out.

A key advantage is Corporate Travel’s internally developed technology suite which drives high levels of automation and a superior customer value proposition. This capital light, technology-rich business model also results in lower fixed costs relative to peers, allowing management to swiftly respond to changed market conditions by re-sizing the cost base without materially impacting capabilities.

We believe management have navigated the COVID-19 crisis well, significantly reducing the monthly cash burn and thereby avoiding the need for a deeply discounted emergency capital raise to restore the balance sheet (unlike most of its travel peers).

Indeed, Corporate Travel’s FY20 result was a clear standout this earnings season (stock rocketed up over 80 per cent in August), materially beating market expectations thanks to a higher baseload of essential services travel and tighter cost control. Stronger than anticipated cashflows also challenged the short thesis on the stock, leaving the balance sheet in solid shape with plenty of capacity to weather a prolonged downturn.

Notwithstanding the uncertain road to recovery (choose your own adventure), Corporate Travel has strategically positioned itself to return to profitability based on domestic only activity (more than 60 per cent of pre-COVID transactions were within country), reducing reliance on international borders reopening. Higher cost competitors are not as fortunate, likely presenting Corporate Travel with a large pipeline of M&A opportunities over the coming years.

Valuation appears attractive, even after the strong recent bounce. At $15.50 per share, the stock is trading on just 11x FY19 (pre-COVID) EBITDA of $150 million. Consensus assumes earnings get back to this level in FY23 which looks reasonable, although certainly not a given(note this doesn’t require revenues recovering to pre-COVID levels given the significant costs taken out of the business).

For sure, questions remain about potential structural changes in travel behaviour in the ‘new normal’ world we find ourselves in – only time will tell. We take some comfort in Corporate Travel’s relatively small position within the very large global travel markets of North America, Europe and Asia (more than 80 per cent of revenues generated outside of ANZ), the improving operating momentum, low monthly cash burn and strong balance sheet.

Key FY20 result details:

  • Total transaction value declined 29 per cent in FY20 to $4.6 billion, reflecting COVID-19 impacts from late February. Consequently, revenue fell 22 per cent to $350 million.
  • Underlying EBITDA of $65 million (vs FY19 $150 million) with $0.5 million in 2H20.
  • Solid baseline of revenues generated from essential travel client base, averaging $11.5 million per month over 4Q20 (representing 27.5 per cent of the prior period). This was well ahead of May guidance for $2-5 million monthly revenue over the final quarter (5-10 per cent of prior year).
  • 4Q20 underlying EBITDA loss of $9 million (average $3 million per month), significantly better than the $5-10 million monthly loss forecast in May.
  • Client activity bottomed in late April and has recovered since. Despite July being the seasonally slowest month (northern hemisphere vacations), client activity improved sequentially on June, resulting in a lower underlying EBITDA loss of $2.2 million (with the European and ANZ regions breaking even in the month).
  • The July cost base was $13.5 million per month. Corporate Travel expects a $16 million monthly cost base will support a full domestic and meaningful international recovery.
  • Around 60 per cent of pre-COVID revenues relate to domestic travel, equivalent to $25 million per month.
  • Stronger 4Q20 cashflows delivered a much stronger balance sheet position with $60 million of net company cash as at 30 June 2020 (vs May guidance of $20-25 million) and $55 million at 17 August 2020. Corporate Travel has zero debt and a GBP100 million undrawn funding facility.

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