The Corporate Travel Management Ltd (ASX: CTD) share price is running ahead of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index after UBS upgraded the beaten down stock.
The CTD share price jumped 1.6% to $23.56 in after lunch trade as other travel stocks like the Webjet Limited (ASX: WEB) share price lost 0.9% to $11.89, Helloworld Travel Ltd (ASX: HLO) traded flat at $5.70 and Flight Centre Travel Group Ltd (ASX: FLT) share price added 1.5% to $43.89.
But Corporate Travel's share price rebound still leaves the stock trading close to 30% in the red since the broad-based market sell-off from September last year and an attack on the stock by hedge fund VGI partners.
The weakness provides an attractive buying opportunity for true believers and UBS has upgraded the stock to "buy" from "neutral" as the broker is bullish about Corporate Travel's growth potential from both organic and acquisitive opportunities.
Valuation upside
"At current levels we estimate that nothing is being priced in for future acquisitions, if we apply our blended valuation methodology," said UBS.
"If we only apply our PER valuation methodology, we estimate that ~$19m p.a of acquisitions is being priced in – well below the average of $62m p.a spent over the past 5 years."
There is also room for the company to grow organically. In fact, UBS is forecasting an earnings per share (EPS) compound annual growth rate (CAGR) of 14% from FY20 to FY23 without management making any acquisitions.
The robust double-digit organic growth forecast is enough to justify buying that stock, which is trading on a reasonable one-year forward price-earnings (P/E) multiple of around 23 times.
Throw in an earnings accretive takeover or two and you can see why UBS thinks the stock is a buy for 2019.
Skeletons in the travel closet
The broker also thinks that VGI's criticism that management is cooking the books is overstated. One of the key concerns was that Corporate Travel had fewer than the 2,300 employees it claims it has.
UBS notes that the company's accounts support management's claim with Corporate Travel paying an average salary of $81,000 a year to each employee. This contrasts with the $75,000 a year average salary paid by Flight Centre and $73,000 for Helloworld.
"We are comfortable that CTD has a strong employee presence – which in our view is the key variable for generating additional sales," added UBS which has a $31.20 per share price target on the stock.
"We have also looked at half yearly operating cashflow conversion ("OCFC") for Australian travel related stocks (CTD, FLT, HLO, WEB) over the last 4 years (FY15-18). All stocks show large half yearly swings, however average FY OCCF is generally good (CTD 94%, FLT 102%, WEB 127%, HLO 42%)."
The weak Australian dollar also provides further upside to Corporate Travel as three quarters of its earnings comes from offshore. If the exchange rate stays at current levels till the end of FY19, that will add another 4% upside to UBS' EPS forecast for the company.
