The Corporate Travel Management Ltd (ASX: CTD) share price looks set to return to trade this morning following the release of a comprehensive response to a research report by VGI Partners.
VGI Partners is a hedge fund that holds a substantial short position in the corporate travel specialist and stands to benefit from any share price decline.
It released a 176-page report to clients over the weekend which identified 20 concerns in relation to the company's operations.
Corporate Travel Management swiftly put its shares in a trading halt in order to work on a response which included seeking advice from its corporate and legal advisers.
The response.
The Corporate Travel Management board has acknowledged two issues raised by VGI Partners.
The first one relates to the need for the company to keep its website updated with its office locations. VGI Partners claimed that it had listed "phantom offices" and was misleading by overstating the number of physical locations in which it operates.
The second issue that the board has acknowledged is the use of the term 'patented' in relation to its proprietary technology. VGI Partners claimed that the company's client facing technology was not patented and was only proprietary. Thus, it does not add a competitive advantage as claimed.
The remaining 18 issues have been refuted with the board stating that: "the rest of the report either misunderstands or misrepresents the Company's financial performance, governance and business model."
The key points in the response are as follows:
- The company rejects the claim that a change to revenue recognition policy made a material difference to its FY 2018 earnings. There is no material impact from the policy change, which led to a $0.5m adjustment, representing a 0.4% contribution to FY 2018 EBITDA.
- The company rejects the claim that the growth of receivables in FY 2018 was a result of the change in revenue recognition policy. It was predominantly due to strong growth in TTV (Total Transaction Value) and timing differences in the working capital cycle.
- The company rejects the claim that a decline in FY 2018 second half cashflows indicates poor revenue quality. The movements in cash payments are primarily timing differences. Over time, the company has consistently delivered at or near 100% cash conversion.
- The company rejects the claim that client cash balances appear very low when compared to peers. The cash balances and associated interest income of a corporate travel company are typically lower than a leisure dominant business, which has a different business model.
- The VGI report dedicates 58 pages to alleging that the company's global office footprint is overstated. The company rejects this claim and advises that it has a clear strategy to establish a global footprint and generate scale, but is not intending to do this by building a costly and less productive small office 'bricks and mortar' empire.
What now?
While the response appears to be quite comprehensive, it will take time to be fully digested by the market.
And as was the case with Blue Sky Alternative Investments Ltd (ASX: BLA) and Glaucus, I think it is quite likely that VGI Partners will come back with a response to this rebuttal.
Because of this, I suspect that the market will still selloff the company's shares today when they return to trade.
And while it may be tempting to buy the dip, I think investors looking at the travel industry might be best considering Helloworld Travel Ltd (ASX: HLO) or Webjet Limited (ASX: WEB) until this matter blows over.
