Morgan Stanley slaps outperform rating on Corporate Travel Management Ltd shares

The share price of Corporate Travel Management Ltd (ASX: CTD) is jumping higher today and the short-term burst in performance could extend over the next two weeks if Morgan Stanley’s prediction comes through.

The stock is up 1.6% this morning to $25.17 compared to the 0.4% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

Its peers are also enjoying a good day with Flight Centre Travel Group Ltd (ASX: FLT) adding 1.3% to $56.14 and Webjet Limited (ASX: WEB) surging 2.4% to $11.30. Only Helloworld Travel Ltd (ASX: HLO) is trading flat.

But the next couple of weeks could belong to Corporate Travel as Morgan Stanley thinks there is an 80% plus chance that the stock will outperform the market after management reaffirmed its FY18 earnings guidance and acquired a privately-owned rival agency SCT Travel Group, trading as Platinum Travel Corporation.

Corporate Travel is forecasting a 27% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) for FY18 to around $125 million. This implies an EBITDA growth rate of 20% for the second half of this financial year and the growth momentum is tipped to continue into FY19.

What’s more, the guidance does not include the earnings contribution from the SCT Travel acquisition, which management is excited about because it complements its strategy to expand into the corporate small and medium enterprise (SME) events market.

But given the timing of the acquisition, investors won’t see any financial impact from SCT Travel until FY19.

Corporate Travel paid $5 million in cash and stock, equating to around five-times FY19’s expected earnings before interest and tax (EBIT), and will pay an earnout if certain longer-term targets are achieved. The takeover is funded largely from the acquirer’s short-term cash flow.

I suspect this won’t be the last acquisition Corporate Travel will undertake, and given the modest cash payment for the business, Corporate Travel still has sufficient firepower to undertake further buyouts.

At the rate the stock is performing, it could soon challenge its record high of $26.32 set at the end of February this year. Morgan Stanley has an “outperform” recommendation on the stock with a price target of $27.00 a share.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of Helloworld Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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