The Corporate Travel Management Ltd (ASX: CTD) share price lifted 4% to $25.24 this morning after it reconfirmed guidance for full year EBITDA (operating income) to come in around $150 million. It also told investors it's "targeting" 15% organic EBITDA growth in FY 2020 and FY 2021 excluding the additional benefits of any acquisitions.
I'm don't think there's a semantic difference between a "target" and a "forecast" and the market is probably bidding the stock higher on the basis that it's undervalued if it can deliver on these "targets".
However, in fairness Corporate Travel does have something of a cloud hanging over as its net cash flows from operating activities for the six-month period ending December 31 2018 were just $14.1 million, compared to $25.7 million. Yet the business reported underlying net profit growth of 20% to $42.6 million.
It's the cash flow to profit and loss statement mismatch or (weak operating cash conversion ratio at 45%) that has confused investors and lead to the stock falling in value recently.
Today though management once again reported the variation was due to timing differences between when it's paid by clients for tickets and when it makes payments to travel suppliers like airlines for tickets.
To think of this simply, if you run a sweet shop and buy cola bottles wholesale for 50 cents each and sell them for $1 dollar, you would be $15 dollars in cash flow down if someone took 10 cola bottles but arranged to pay you later ($10 owed +$5 paid).
In this example we can see how timing differences can greatly exaggerate cash flow swings, although the P&L statement would tell a different story as companies can account for revenues on an accrual basis.
So if we take management on its word that the admittedly large swings in cash flow conversion are due to this kind of effect then the stock is probably reasonable value at today's price.
According to management the group is on track to achieve 100% operating cash flow conversion over fiscal 2019.
However, if its cash conversion doesn't deliver on its promises then the stock is likely to get belted as this pattern over too long a period would suggest some financial alchemy at work.
It's also notable that Corporate Travel has employed a roll-up or acquisition strategy in the past that relies on a high share price to be effective.
This is because underwriting any good roll up's success is arbitrage or the ability to buy a company on 5x EBITDA by raising capital on 15x EBITDA and profiting from the price difference between two similar assets.
This is an old share market trick that can be successful, but only if the share price remains high which explains the desperation of short sellers to talk down the stock price.
Others in the travel space offering mixed performance recently include Flight Centre Travel Group Ltd (ASX: FLT) and Webjet Limited (ASX: WEB), both of which are suffering on the back of the UK's Brexit paralysis.
