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Corporate Travel Management Ltd (ASX:CTD) responds to second report by VGI Partners

The Corporate Travel Management Ltd (ASX: CTD) share price will be on watch this morning after the corporate travel specialist released its response to a second report by VGI Partners.

Once again, the company has stressed that VGI Partners has a fundamental misunderstanding of the corporate travel sector and the Corporate Travel Management (CTM) business model.

On this occasion the company has engaged EY to provide support, assess certain matters relating to its financial statements for FY 2018, and respond to matters raised by VGI Partners.

The company called in EY due of its experience in the travel sector. Because it is the auditor of Flight Centre Travel Group Ltd (ASX: FLT) and other global travel sector participants, it has a deep understanding of travel sector accounting practices and also the difference between the corporate and leisure sectors.

EY has provided the company with its preliminary observations with respect to certain issues raised by VGI and notes that the short report is “superficial”.

Here is a quick summary of its response:

Concern 1: VGI has suggested that CTM’s North American segment is vulnerable to a potential write-down as at 30 June 2018.

Response: The post-tax discount rate used by CTM for the purpose of its impairment assessment is consistent with standard market practice. The post-tax discount rate used for the impairment assessment of the North American Cash Generating Unit (CGU) in FY 2018 (9.5%) was 0.9% lower than that used in FY 2017 (10.4%) predominately due to movements in the country equity risk premium and the asset beta.

EY: EY has assessed all of the above, including the methodologies used, sources of information and the conclusions drawn, and has not identified any issues or concerns. EY confirms that if the higher FY 2017 discount rate was used in FY 2018 there would have been no impairment required.

Concern 2: VGI has questioned the quality of CTM’s audited financial position, particularly relating to its working capital.

Response: Their concerns are unfounded. The implication from VGI’s report is that the company’s working capital position is not trending in the same direction as TTV. This is incorrect.

EY: The company’s net working capital position continues to trend in line with TTV, the true measure of CTM’s market activity. VGI’s report does not accurately reflect the full extent of the payments and receipts of CTM in the periods referred to.

Concern 3: VGI has used the company’s FY 2018 interest income of $0.13m to suggest that it holds “very little cash during the year”.

Response: This is because the company uses its variable cash position as an offset to its financing facility to manage working capital movements. This is reflected in the debt repayments and debt draw downs in the Statement of Cash Flows. In addition to this, it has geographically dispersed cash accounts across its international operations and, as a result, earns little interest on these largely ‘at-call’ accounts.

EY: EY has assessed its cash account fluctuations and low interest income, and has confirmed that its low interest income is not reflective of its closing cash balance and the $84.3 million closing cash balance is consistent with the average monthly balance across the preceding 12 months.

What now?

While the company’s response has once again being comprehensive, time will tell whether it will be enough to stop its shares from sinking lower.

I’m going to sit this one out and watch on from the safety of the sidelines.

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Motley Fool contributor James Mickleboro 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. 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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