Just two months ago travel agency Corporate Travel Management ('CTM', ASX: CTD) was flying high after announcing record EBITDA for FY18, but now its success has been called into question by hedge fund VGI Partners.
The Brisbane-based travel agency has entered a trading halt while it takes time to review a searing 176-page presentation the Sydney and New York-based hedge fund gave to wholesale investors explaining its short position on more than $54 million worth of shares in CTM.
VGI points to 20 red flags including allegations CTM has overstated its global footprint with "phantom" and "ghost" offices in several locations, while the fund has questioned its unusually high EBIT margins and believes declining cash flows are at odds with claims of strong organic growth.
"Some of the red flags, viewed in isolation, may be of no concern and others may be individually explainable. However, we believe in aggregate they paint a troubling picture," the hedge fund said in a letter to wholesale investors.
VGI highlights Corporate Travel Management's current market capitalisation of $3 billion compared to a a $70 million valuation at IPO in 2010, which puts shareholder returns in the past five years above the likes of global success stories like Amazon, Facebook, Apple and Alphabet.
The hedge fund questions why CTM's EBIT margin of 32 per cent is double that of its peers when business and government customers are usually sophisticated buyers of travel agency services with competitive tenders.
"We believe Corporate Travel's reported margins are surprising and we question whether the Company is twice as profitable as its peers," VGI says.
The hedge fund also believes the market missed the significance of CTM's failure to disclose its revised revenue recognition policy.
"Corporate Travel reported revenue growth of 14% in FY18 and management used this result to demonstrate that Corporate Travel does not need acquisitions to grow revenue," the hedge fund says.
"However, Corporate Travel made an important change to bring forward the recognition of certain categories of commission and we believe the change may have provided a one-off boost to the FY18 results. The Company failed to disclose the impact of the change."
VGI has also observed anomalies in CTM's cash payments to suppliers and employees, which recently reached their lowest levels since the second half of 2014 when revenue was half what it is today.
"Declining cash payments of this magnitude are, in our view, unusual for a growing business with a large salaried workforce," VGI Partners says..
"We note that the Company's wages bill for the half year ($96 million per the income statement) exceeded the total reported cash payments to suppliers and employees of just $62 million which we see as a further anomaly."
VGI staff also visited each of the 12 European office locations listed on CTM's website, and could "find no trace of Corporate Travel at five locations".
"One other office had Corporate Travel signage but the office was not attended on any of the occasions that we visited. Visits to the Company's United States locations identified two locations that were vacant or unattended during business hours," VGI says.
Another red flag for VGI was the fact CTM directors and senior executives have recently been selling their shares in the business.
"Among the notable disposals in FY18 Chris Thelen, who is charged with driving performance in North America, sold 99.9% of shares that he held at the start of the financial year," VGI says.
"Steve Fleming, the Company's longserving CFO, finished the year with just 25,131 shares (less than he's held at any year-end since IPO) having sold 92,447 shares during the year.
"Jamie Pherous, Managing Director and founder, sold 1.165 million shares during the year."
VGI also believes CTM's growth through acquisitions has clouded underlying performance.
"We believe Corporate Travel's disclosures do not allow investors to properly determine the underlying performance of the business.
"The Company has completed 20 acquisitions over the past decade at an aggregate cost of $527 million, and we believe that these repeated acquisitions provide significant flexibility in the way the Company presents its performance and earnings."
VGI's $640 million ASX-listed fund VGI Partners Global Investments (ASX: VGI) confirmed its position today with a portfolio weight of approximately 2.6 per cent, or 609,906 shares in Corporate Travel Management. In total VGI has a short position on more than two million shares in the company.
CTM was made aware of VGI's position at 3pm yesterday, and has prepared a short statement while a trading halt is in place until the earlier of the commencement of normal trading on 31 October
"The report also notes VGI is positioned to realise gains in the event that Corporate Travel's share price falls. In this regard, VGI states it has a vested interest in Corporate Travel's share price declining over time," a CTM spokesperson said.
"CTM takes the claims seriously and we look forward to providing a detailed response as quickly as possible."Never miss a news update, subscribe here. Follow us on Facebook, LinkedIn, Instagram and Twitter.
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