While Corporate Travel Management’s (ASX: CTD) shares have been suspended since 26 August - after the beleaguered global travel management company revealed accounting irregularities in its UK operations – a growing cadre of institutional investors has decided to pre-empt the next tranche of bad news by writing off their holdings ahead of further share price falls.
Based on serious doubts over the company’s integrity or viability, the one-time share market darling was removed from the ASX 200 Index in the December rebalance, and the market is under no illusions that the value will continue to fall when trading resumes.
What we know so far is that the UK branch has been overcharging clients since 2023.
Please explain
As a result, the UK and Australian governments – both of which are CTM clients – have since launched separate investigations into the company’s accounts.
CTM’s removal from the ASX200 coincides with decisions by Forager Funds Management and Wilson Asset Management to mark down their investment in the company by 50%.
By his own admission, Wilson Asset Management's portfolio manager, Oscar Oberg, called CTM’s recent update a major shock and considers it one of his worst stock picks in a decade.
"We are incredibly disappointed with the findings and have written down our investment in the company by 50% to reflect uncertainty over the outlook for the business," WAM said in an investor update.
More recently, Hearts & Minds Investments (ASX: HM1) – which has some 1.25 million shares in CTM, equating to more than $20.1 million - was written off last week.
"In the absence of an observable market price, we have adopted a very conservative position of carrying the holding at zero," HM1 told the market.
"Should CTM ultimately recommence trading at the same price it had at the time of its trading halt, it would have a positive impact on pre-tax NTA of 9 cents per share.”
On an equally positive note, HM1 does expect the holding to realise value over time and will adopt this valuation approach in the absence of a traded market.
Worst yet to come
However, that’s cold comfort for existing shareholders who are now faced with the possibility that the days of CTM trading on the ASX are potentially over.
Steve Johnson, chief investment officer at Forager, has already told the market that writing the investment down to zero remains a distinct possibility.
He also told the market he “would not be shocked if it doesn’t trade again.”
Like most investors, he expects further deterioration in the stock’s fortunes before there are any material improvements.
Then there’s fellow institutional investor in CTM, the Bennelong Australian equities fund – down 9.3% in November – which is understood to have also significantly slashed its valuation on the stock.
Bennelong recently told investors that while the stock was suspended, it has been marking the CTM valuation in line with market movements and moves in the share prices of travel industry peers.
"We had applied a further discount to reflect the uncertainty and illiquidity caused by the trading suspension... To calculate an appropriate valuation multiple we compiled a basket of travel-related companies and other appropriate small cap peers,” Bennelong said.
Adding further to current shareholder worry, Spheria Asset Management has also downgraded its investment in CTM.
Major refunds likely
Meanwhile, what’s adding to fears over governance, balance sheet risk and potential for client refunds, were revelations by auditor Deloitte of "potential material adjustments" related to the European region and to revenue recognised in the financial statements of the CTM UK group.
The group has since hired KPMG in the UK to conduct a forensic review of certain aspects of the FY23 to FY25 financial statements of the UK operations.
KPMG is now second-guessing the revenue charged to large customers between 2021 and 2023 to the tune of GBP45.4 million ($91.5 million).
However, across FY23 to FY25, it’s understood that the overstatement could exceed GBP77.6 million ($156 million).
Given that the audited FY25 financial statements remain in limbo, the ASX suspension is unlikely to be removed prior to year’s end.
Meanwhile, Wilson Asset Management said the magnitude of potential client refunds came as a "major shock to the market."
UK CEO stood down
Adding further fuel to this latest bombshell - released to the market on 28 November - was CTM’s decision to temporarily stand down its CEO for the UK and Europe, Michael Healy.
Based on CTM's 2024 annual report, its founder and managing director, Jamie Pherous, had the largest stake of nearly 12%.
Other instos with holdings in the stock include First Sentier Investors' Australian Small and Mid-Cap Companies, AustralianSuper, and ECP Asset Management's Emerging Growth Fund, which has also marked down its position in line with media reports.
Meantime, while CTM’s founder Pherous insists that the scandal is only related to the UK region, shareholders may see this a laughable given that it's a significant portion of CTM's European operations and a major part of its global footprint.
Two weeks ago, Macquarie downgraded CTM to an Underperform rating with a reduced price target of $11.50, citing significant risks from ongoing forensic reviews, potential customer refunds, and required revenue restatements.
As of 31 October, CTM's cash was $148.3 million, with no debt drawn.
Corporate Travel Managements' market cap is currently $2.3 billion, but is likely to take a material hit if and when it resumes trading.
The share price is up 17% year to date.
