A larger Corporate Travel hitches recovery to border reopenings

Buoyed by the prospect of a strong resurgence in corporate travel in 2022, as more borders progressively reopen, Corporate Travel (ASX: CTD) has signalled plans to acquire Helloworld’s (ASX: HLO) corporate travel segment with an enterprise value offer of $175m.

Helloworld's share price was up around 4.15% following this morning's announcement.

As a leading Australian & New Zealand travel distribution company, Hello World operates via the key brands QBT, AOT Hotels, TravelEdge and Show Group in Australia and APX and Atlas Travel in NZ.

Building on Corporate Travel’s existing core as a global specialist corporate travel management firm - with FY19 pro-forma total transaction value (TTV) of approximately $12bn and revenue of approximately $810m – the acquisition is expected to be completed in first quarter 2022.

Based on Helloworld’s numbers, its corporate travel business posted normalised earnings (EBITDA) of $22m in pre-pandemic FY 2019, which values the deal at around eight times historic normalised earnings.

Added scale

Helloworld Corporate is expected to result in a materially larger (Corporate Travel) organisation upon full revenue recovery, with Helloworld Corporate contributing additional: Revenue $90m (+12%), and earnings (EBITDA) $30m (+13%).

On a pro-forma FY19 basis, A&NZ’s contribution to Corporate Travel’s group revenue is expected to increase from approximately 17% to 27%.

Corporate Travel management have guided to an estimated full run-rate synergies – due combining office footprints in a number of key A&NZ cities - of $8m upon full recovery to FY19 revenues.

EPS accretive

The deal – which is expected to be earnings per share (“EPS”) accretive on a pro-forma FY19 basis - will be structured with a $100m cash payment and $75m in Corporate Travel shares to be escrowed for 12 months from the deal’s completion.

Corporate Travel immediately entered in a trading halt this morning on the news that the company is seeking to raise $100m via a $75m institutional placement and a $25m share purchase plan.

Undertaken at $21.00 per new share, the $75m placement represents a 5.8% discount to the Corporate Travel share price before it entered a trading halt this morning.

The company is expected to resume trading on Friday 17 December 2021.

Fundamentals

Hit hard by covid-induced lockdowns, Corporate Travel’s net operating cash flow in in FY21 was -$60.4m, versus $135m in FY19 and $72.9m in FY20 respectively.

The company recorded net profit margin in FY21 of -31.13% versus 19.49% in FY19.

As at 30 November 2021, the company had an operational cash position of $102m, and no debt draw.

On a more positive note, unlike its peers, Corporate Travel managed to generate positive earnings in the first quarter FY22.

What brokers think

Morgans is encouraged by Europe returning to pre-covid profitability on only 80% of the activity. 

Macquarie notes that while A&NZ Asia are still behind on reopenings, North America’s recovering story will unfold in the second half.

Equally encouraging, Citi believes sales are running ahead of consensus forecasts.

Since 29 November, Corporate Travel’s share price has bounced from $21.29 to a high of $23.58, back down to around $22.29 at the close yesterday.

Consensus on the stock is Moderate Buy.

Based on Morningstar (Quantitative) fair value of $21.74 the stock looks overvalued.