You wouldn’t know it, to listen to some of the talking heads and vested interests at the moment, but the Australian economy is actually performing quite nicely.
According to the most recent figures from the ABS, Gross Domestic Product (the value of the goods and services we produce) is growing and unemployment is falling. The RBA saw fit – despite the expectations of many – to keep rates on hold.
The reason – for all of the negatives coming out of Europe, and the pain being felt by certain sections of our economy (certain discretionary retailers and the entire steel manufacturing sector for two) – our economy is actually doing pretty well.
Sure, it doesn’t suit the narrative that some are seeking to tell, but it happens to be the truth.
Of course there are those companies, sectors and even some regions who are doing it tougher than others, but that’s always the case. Overall, we’re in good shape.
Our companies are flying
That much can be seen from the success – despite the odds and conventional wisdom – of Flight Centre’s (ASX: FLT) business. A company that was supposed to wither and die in the face of the internet’s do-it-yourself capability has continued to go from strength to strength.
Another business experiencing great success in that space is Corporate Travel Management (ASX: CTD).
Like FCm, Flight Centre’s business division, CTM has cleverly positioned itself towards the upper end of the travel market – the corporate segment. This part of the market tends to be less price-sensitive, possesses a greater propensity to engage ‘do it for me’ rather than ‘do it yourself’ providers, and usually has more complex travel requirements.
The corporate market is also more likely to negotiate bulk rates with flight and accommodation providers, and so prefer to funnel all of their travel needs through a single agency which can facilitate these deals (and ensure bookings are compliant with the corporate policy).
Flight Centre is clearly the gorilla in this particular room, with corporate bookings (globally) making up 25 – 30% of their total transaction value of $12.2 billion for the 2011 financial year. By comparison, CTM recorded total transaction value of $502m in the same financial year.
While the economic downturn of the past few years certainly would have impacted on the amount of corporate travel (and companies’ propensity to book business class seats), the sector seems to have bounced back with a vengeance.
In the most recently released announcement, CTM reported growth in total transaction value of 42% to $316 million for the first half of the 2012 financial year. The market liked those results, sending the shares up 10% in the days that followed the announcement.
CTM has grown both organically and by acquisition since it was listed on the ASX at the end of 2010. The company has no net debt, and delivered a return on equity of over 20% in the most recently completed financial year – an impressive result, and a significant improvement on the prior year.
Risks and opportunities
If CTM can manage to convert the growth in total transaction value into profit at a reasonable rate (which should be quite achievable), the company should be able to report impressive first half earnings growth when it reports on Wednesday.
The business isn’t statistically cheap, trading at just over 15.3 times last year’s earnings and with a dividend yield of 2.3%, fully franked, but this is one business for which the rear-vision mirror isn’t the best lens.
Long term success for CTM requires them to remain a supplier of choice of travel services for the corporate sector – to hold or grow market share and for the ‘do it for me’ model to remain the best value-for-money option for CTM’s customers.
The risks to CTM’s business are the same risks that are faced by the sector as a whole. A recession or other economic slowdown will significantly curtail corporate travel, as would a SARS-like health scare in some of our more popular corporate travel destinations, while the internet remains the great unknown, with technology continuing to revolutionise many sectors of the economy.
The company is also a relative newcomer to the ASX, so investors don’t have a lot of history to go by. Everything the business has done in its short life as a public company suggests it is managing to win new customers and take advantage of those customers’ willingness to travel. While the current growth rates clearly can’t be sustained forever, today’s share price isn’t too demanding for a business with what should be a bright future ahead of it.
CTM is a company going places (if you’ll excuse the pun), and is priced for a moderately successful future. The results and announcements so far this financial year point to a very strong 2012 and beyond. A travel slowdown notwithstanding, CTM is a business investors should seriously consider adding to their portfolios at the current price.
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Scott Phillips Is The Motley Fool’s feature columnist. You can follow him on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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