CTM claims short seller VGI took advantage of Covid-19 uncertainty

2 March 2020, Written by Matt Ogg

CTM claims short seller VGI took advantage of Covid-19 uncertainty

Corporate Travel Management (ASX: CTD) has slammed a new report from short seller VGI Partners, accusing the company of taking advantage of market uncertainty caused by the novel coronavirus Covid-19.

It has now been more than16 months since VGI launched a scathing attack on CTM alleging discrepancies between supplier payments and wages, the overstatement of profit margins and that "phantom" offices were lifting its global footprint.

CTM founder and CEO Jamie Pherous (pictured) launched a spirited defence of his company which was successful until February last year, but shares have plunged by more than half since then to $13.06.

Prior to the outbreak of Covid-19 the company's shares were experiencing a significant rebound, however like most travel stocks they have plummeted over the past month.

Now that Sydney and New York-based VGI has criticised CTM again, the Brisbane company's board appears to believe there is no coincidence it has been released during a period of global turmoil in the travel industry.

"The timing of the release of VGI's latest report, appears to be an attempt to use the current uncertainty caused by Covid-19 to promote further market uncertainty with respect to CTM, despite this affecting the entire travel sector and the broader economy," Corporate Travel Management said this morning.

"CTM remains focused on managing the performance of the underlying business during this period of disruption to the travel sector and supporting team members, customers and stakeholders.

Corporate Travel Management have extracted five concerns from VGI's latest report, which it believes were addressed in the first half results and accompanying disclosures:

  • VGI's report claimed that CTD had "blamed" the company's 1H20 result on the coronavirus;
  • VGI's report claimed that volume-based revenue is in decline;
  • VGI claimed that CTD produced negative free cash flows to equity in 1H20 and is unable to reconcile its cash flow movements on page 18 of the investor presentation;
  • VGI's report claimed that CTM has been increasingly capitalising software development, and amortisation of previously capitalised costs are an increasing drag on profits; and
  • VGI's report raised questions about intra-period borrowings, and raised the prospect of using credit cards to pay bills while repaying debt. VGI also raised what appeared, to them, to be very high rates of interest paid and low levels of interest received.

CTM has provided a detailed response to these allegations, but it leads with claiming the short seller has "chosen to ignore" the macroeconomic the impacts of Brexit, the Hong Kong unrest and the US/China Trade war on results.

"Any weakness in 1H20 was not "blamed" on coronavirus. Covid-19 was referred to in the context of FY20 guidance which related to 2H20 impacts," the company said.

In terms of an alleged decline in revenue, CTM says VGI notes a 6 per cent ($3 million) decline in volume-based revenue but appears to ignore the 9 per cent ($14 million) increase in transactional revenue.

"On page 10, point 3, of the Investor Presentation, we have clearly indicated that in Asia we successfully executed a supplier revenue strategy to de-risk the volumebased overrides. This strategy resulted in a movement from volume-based to transactional revenue.

"Significant annual volume-based override contracts that do not finish at 31 December are only present in ANZ.

"Asia is the region with the highest proportion of volume-based revenue, and these contracts in Asia are predominantly quarterly, so much of the amounts owed are known as at reporting dates."

The travel company emphasises its operating cash flow was positive in the first half of FY20, and that an explanation in its investor presentation about what influences cash flow swings has garnered positive feedback.

With regards to the capitalisation of software development, CTM says it has been very clear with the market about its tech strategy and that its amortisation approach has been conservative.

"CTM are very transparent about the amounts of software development we expect to capitalise," the company said.

"Software capitalisation is expected to amount to A$22.5 million in FY20 as CTM seeks to maintain its market-leadership position in technology. CTM expects to continue to increase the amount capitalised as we grow.

"The assets that these activities create are a key point of differentiation for CTM and continue to drive the relative business outperformance in all regions in which we operate."

The group claims VGI's characterisation of large intra-period balances in the Statement of Cash Flows is incorrect.

"If a $20 million maturity is rolled for another three months, that will show both a $20 million repayment and $20 million proceeds from borrowings," the company said.

"Credit cards and borrowings are not as closely linked as suggested by VGI. The card facilities are primarily used for the benefit of clients via virtual credit cards in accordance with normal industry practice for corporate clients.

"VGI appear to have overlooked the impact of the voluntarily disclosed borrowing costs on page 18 of the Interim Financial Report."

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Author: Matt Ogg

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