This time last year, we outlined our positive view on Corporate Travel Management (CTD) at Livewire Live. At the time, it had a large and growing short interest position, but we believed the market was not valuing the long-term opportunity appropriately.
Inherent in this thesis was that consensus long-term earnings growth estimates were too low, as CTD’s superior customer value proposition was being underestimated. CTD has a strong, team-based organisational culture focused on providing high levels of service to its corporate customers. The company’s commitment to innovation and technology, with over 100 staff in technology, has fostered a compelling value proposition. CTD offers a personalised service at a significantly lower cost than its clients would be able to achieve themselves.
Our investment thesis on CTD continues to be validated with each reported result. Reported sales and earnings continue to grow strongly and management continues to add to their global footprint intelligently through targeted acquisitions. We believe Corporate Travel Management (CTD) will continue to grow sales and earnings at high double-digit rates over the coming five to ten years. This level of growth and length of duration is very valuable, in what we believe will be a structurally challenged GDP growth environment over the next decade. The world faces a number of structural headwinds including an ageing population, high debt levels, rising wealth inequality and increasing computerisation and automation. In contrast, CTD has less than a 1% market share in a growing global corporate travel market.
The company has a customer-aligned remuneration structure under which employees are predominantly paid fixed salaries, incentivising service rather than sales volume, which contrasts with that of its competitors. Given this differentiation, we believe it is hard for larger players to match CTD’s service offering and highly efficient operational structure. In addition, we are of the view that boutique travel agencies do not have the adequate scale, technological resources or geographic footprint to challenge CTD. This translates into market-leading profit margins, returns and financials for CTD shareholders.
“We believe Corporate Travel Management (CTD) will continue to grow sales and earnings at high double digit rates over the coming five to ten years”
Key risks and opportunities
Corporate Travel Management (CTD) has proven its business model in Australia and Europe where over 80% of its transactions are processed online. CTD is largely immune to technology-related disruption as it has already heavily automated most of its business travel transactions. The company continues to grow strongly in Australia and we believe its market share of 15% will continue to expand. CTD can provide high levels of service on complicated travel while lowering costs for its clients on more routine business trips. This is very difficult to do and requires a combination of talented service orientated staff and excellent technology.
CTD has the opportunity to repeat this model in both the USA and Asia. If successful, this will provide years of strong organic growth through ever-increasing customer wins and end market penetration. The economics and financials of CTD are compelling, world-class and will allow its intrinsic value to rise over time as it continues to grow. The key risk for investors is around a macro shock, particularly associated with some geopolitical event, that disrupts business confidence and corporate travel. This could happen quickly and a downturn in client activity could be severe. However, long term investors should be able to look through such an event - we would expect a negative and potentially severe short-term share price reaction. We believe our proprietary portfolio construction process would allow Hyperion to exploit any future short-term event-driven correction in the share price.
“The key risk for investors is around a macro shock, particularly associated with some geopolitical event, that disrupts business confidence and corporate travel.”
This article was co-written by Mark Arnold and Jason Orthman, Chief and Deputy Chief Investment Officers at high-conviction equities manager, Hyperion Asset Management.