Shares in travel management business Corporate Travel Management Ltd (ASX: CTD) hit a new record high of $15.73 today after the business posted a positive investor update last week.
The business reconfirmed guidance for underlying earnings at the top of end of a range around $68 million for the full 2016 financial year. If achieved this amount would be up around 38% on FY15's total of $49.1 million. This kind of rocketing growth has been achieved through the acquisition of smaller rivals and some strong organic growth as a result of new client wins and cost savings.
Often the businesses that post the most gangbusters growth are those executing a simple business model well. Step forward Corporate Travel as it delivers growth through a sales machine that appears able to win new client thanks to some decent technology and a simple product that clients see the advantages in signing up to.
The corporate travel business is also a scale game where buying power secures better deals and enhances a mild network effect that enables the company to offer superior deals to smaller rivals. Corporate Travel now has substantial operations in Australia, Europe, Asia and the US. The fast-growing economies of Asia in particular something of a growth engine for a business that is enjoying the benefits of scale and a remarkably resilient corporate travel market that if anything is towards the bottom of a cycle.
The company's founder Jamie Pherous also recently announced a deal with the Wesfarmers Ltd (ASX: WES) operated Coles supermarkets. The agreement will see Corporate Travel run a travel booking website named flybuystravel.com that lets users of the flybuys rewards scheme redeem points against the costs of travel bookings.
In effect Corporate Travel is taking its secret sauce into the giant retail travel market, which over time could prove another growth lever for this entrepreneurial travel outfit. It also means other online travel booking companies that already operate in the business-to-business and business-to-consumer space like Webjet Limited (ASX: WEB) and Flight Centre Travel Group Ltd (ASX: FLT) now have some extra competition.
According to ASIC filings Corporate Travel also had 5.3% of its outstanding stock short sold as at May 5, which means the recent sharp share price rises may be a result of short sellers closing out positions at a loss.
Short selling is a high-stakes game, especially so if you target a business like Corporate Travel that has around 73% of total transaction value, 54% of revenue and 80% of underlying EBITDA growth being delivered organically.
The business also has minimal debt, strong operating cash flows, travel tailwinds and a determined founder, which leaves me thinking the professional short sellers may be better off looking elsewhere on the ASX for their targets. So far the short trade has proven an economy-class ticket to CentreLink and I'm unconvinced that will change anytime soon.
The short sellers are presumably targeting the stock on valuation grounds, or in the belief that the acquisitive growth is unsustainable. The valuation is high, but if you assume it can earn 39 cents per share in FY16 based on its most recent guidance then at $15.70 it trades on around 40x estimated earnings. Arguably, this is not excessive for a business growing earnings around 38% if it achieves guidance, with potential to grow at double-digit rates over the next five years or more.
A couple of years down the line today's prices may seem cheap if Corporate Travel keeps executing its simple business model well.
