If there was a moment short sellers declared war against Jamie Pherous and Corporate Travel Management it was the morning of July 6, 2016. That was when Sujit Dey, an influential sales trader at Credit Suisse, sent a note to his hedge fund clients titled "SELL CTD – Organic Revenue Profile Doesn't Justify High Multiple".
Dey walked through why he believed the "small cap darling", which traded at 25 times forecast earnings, would come crashing down to earth. Corporate Travel had, Dey conceded, made its shareholders richer than they could have ever expected since its December 2010 when it listed with an initial market value of $70 million.
That was certainly the case in August when Corporate Travel's market value hit $3.5 billion, valuing the 49-year-old's 22 per cent stake at $776 million.
But Pherous was never destined to become one of the nation's richest travel agents. He landed a job at accounting giant Arthur Andersen and became somewhat the jet-setter after being posted to far-flung corners of the audit firm's empire: Chicago, Dubai and Port Moresby.
That led him to the realisation corporate travel was a drag: the service was bad and the operators were inefficient. Addressing that market need launched him on to the BRW Young Rich list within a decade and allowed him to share the spoils of his success with many of his senior staff and a legion of faithful investors who remain loyal.
Naturally, Corporate Travel's incredible rise attracted scepticism. Its growth is attributed to buying up smaller agencies, but the view among short sellers was that when the deals stopped so would the earnings growth. That has led to fierce debate around the true nature of its organic growth.
Same conclusion
Dey argued that "organically" the business was "going backwards". And the increase in shares sold short, at almost 20 times the average daily trading volume, suggested hedge funds had come to the same conclusion.
But another bullish set of results shifted the share price higher, and the longs had the edge. Pherous, however, would face another attack before the year was out. In November 2016, Australia's most influential investors gathered at the Opera House for the first ever Sohn Hearts & Minds conference. It had become famous globally as a platform for hedge funds to reveal their shorts.
Doug Tynan and Rob Luciano of VGI Partners. VGI sent an email to its wholesale clients, which included a link to a 176-page presentation on Corporate Travel outlining what it described as 20 "red flags" while disclosing it had a near $60 million short on the stock. Brook Mitchell
Three prominent fund managers – Rob Luciano from VGI Partners, Anthony Aboud from Perpetual and Phil King from Regal – were invited to present. Luciano made a pitch based on the US owners of the Bonds underwear brand, Hanesbrands, while King said he was betting against a Chinese bank. It was Aboud who made the biggest impact by taking on an ASX-listed stock in Corporate Travel.
The detail-oriented Aboud argued Corporate Travel fitted the mold of a roll-up built on earnings accretion rather than logic.
"The positive share price of an EPS-accretive acquisition is like a drug for the company's shareholders and management," he told the audience. "They want another hit and inevitably it has to be bigger than the last."
Brisbane-based fund manager Hyperion was taking the other side of the trade. Before the month was out, the growth investor had lodged a filing to show that it had become a substantial holder in Corporate Travel.
Anthony Aboud and Paul Skamvougeras of Perpetual. Aboud publicly called out Corporate Travel as a short in late 2016. _ dom@dominiclorrimer.com
Direct defiance
In July 2017, at a Livewire event, Hyperion's Tim Samway pitched the long case for Corporate Travel, which had run up almost 30 per cent since the Sohn conference. This was despite short sellers amassing an ever larger position against the company.
Samway's pitch was almost in direct defiance of the shorts, who he said were under-estimating the extent to which the company could generate organic growth.
After visiting its locations around the world and talking to customers and competitors, Hyperion was convinced Corporate Travel would deliver that elusive organic growth. The fund manager said the stock would hit $40 within five years.
Tim Samway from Hyperion Asset Management hit back at the Corporate Travel shorts. Jessica Shapiro JLS
Soon after Corporate Travel delivered 43 per cent growth in earnings, as Pherous described the achievement of much coveted organic growth as "pretty stunning". The stock was a 20 bagger.
And while the shorts were still doubting the quality and sustainability of its profits, and its high valuation, Pherous was not too fussed. He refrained from framing his battle with shorts in moral terms.
The short case was failing. The total number of shares loaned out to speculators fell from over eight million to less than three million at the end of the year. In truth, Corporate Travel was hardly loved by small cap fund managers, most of whom did not own the stock but were punished by its inclusion in their benchmark index.
This year, the Corporate Travel deal machine went quiet. The full-year 2017-18 numbers would be a test of just how reliant the company was on acquisitions for growth, and it appeared to pass with a 34 per cent increase in profit.
Jamie Pherous. A job at accounting giant Arthur Andersen that involved being posted to far-flung corners of the audit firm's empire led him to the realisation corporate travel was a drag. Glenn Hunt
Sizeable bet
On the full-year results analyst call executives were asked about the low level of interest income relative to its cash balance; it seemed too low.
And a "number of weeks ago", VGI sent a detailed set of questions to Corporate Travel, to which the company responded, Pherous later told analysts.
"They do turn up to some of our conferences. They often turn up unannounced," he said. VGI's Australian short positions were largely handled by partner Doug Tynan, a former auditor at BDO. VGI had been shorting Corporate Travel in the past, according to the target, but began to amass a sizeable bet as it went to work on the company's accounts.
The hedge fund was not unfamiliar to Corporate Travel and had been shorting the company "on and off for at least a number of years", Pherous said
Pherous said the company got an email late on Thursday of last week with about 20 detailed questions, relating to information that was not public and going back as early as 2011. VGI also asked a question about Corporate Travel's technology – with Pherous saying they described it as sounding "really cool or a phrase like that".
The Corporate Travel team met on Friday and decided, given the nature of the questions and with the annual general meeting coming up, they would leave it till the following week.
"We'll worry about this on Monday. It was always our plan to give them a call," Pherous later told analysts. On Sunday afternoon at 1.57pm VGI sent an email to its wholesale clients, which included a link to a 176-page presentation on Corporate Travel outlining what it described as 20 "red flags" while disclosing it had a near $60 million short on the stock. Before the open on Monday, Corporate Travel stock was placed in a trading halt.
Defiant tone
The company's board said it would take the claims seriously. Corporate Travel would also be keen to avoid the mistakes of other victims of short raids, most notably Blue Sky, whose former managing director called a teleconference without accepting any questions.
On Wednesday, before shareholders gathered in Brisbane for the annual general meeting, Corporate Travel put out what it believed was a clear and comprehensive response.
Pherous struck a defiant tone, but avoided making personal attacks. This was a battle that he said would be fought on the facts, and he kept his comments brief. Most of the probing from analysts related to how the company valued its goodwill, of which over $400 million had been accumulated.
Retail investors in Brisbane, some of whom were clients of local broker Morgans, had already seen a hometown hero in the form of Blue Sky suffer at the hands of short sellers and they called for hedge funds to be taken to task. Brisbane deal maker Howard Stack, who once sat on the board of Flight Centre, derided VGI as "bottom dwellers". But the market was unwilling to ignore VGI's claims. Corporate Travel closed 27 per cent lower on Wednesday.
Pherous, meanwhile, was making himself available to hedge funds and institutional shareholders, saying there was nothing in the VGI report of substance. To many, there were plenty of points that warranted further digging, particularly around VGI's claims that client cash balances didn't grow even as transaction volumes surged.
Corporate Travel's largest institutional shareholder, Hyperion, has remained silent. Some of its senior portfolio managers were in Europe when the presentation hit, but word from the fund's camp was that it was working through its analysis.
Comprehensive retort
But a $600 million Sydney fund, ECP Asset Management, set up by Hyperion founder Manny Pohl felt it had something to add and sent a note to its clients at 9am on Thursday morning which it subsequently posted on Livewire. It was quickly circulated by supportive brokers as the comprehensive retort the company was unable to give. It is not clear if the note had an impact or whether the company's message was getting through but Corporate Travel's stock was recovering. The shares gained almost 12 per cent.
Friday's trading session, however, would tip in VGI's favour as Thursday's gains were given back. Corporate Travel stock slid about 6 per cent. Brokers said the fall was a result of investors being spooked by a Street Talk report that the company was on the radar of the corporate regulator.
The hedge fund's conviction is understood to have solidified following Corporate Travel's response, and it may be making good on its suggestion that it would short more shares.
For now VGI's highly aggressive activist campaign is proving a profitable one.
But whether this public battle for the minds of the market is a one-off or a sign of things to come remains to be seen.
As if the financial and reputational stakes weren't high enough, class action law firm Maurice Blackburn said it was investigating the circumstances of the share price drop.
But it said in a "twist" it would consider both Corporate Travel or VGI in determining which party might be responsible for the shareholder losses.
That prompted a fiercely worded statement from Luciano who said their research was based on "hundreds of hours of research" and that such an action risked creating a situation where "independent analysts in this country were afraid to say what they truly believe".
Profit guidance
And as a brutal week came to a close Pherous was still in no mood to embark on a crusade against short sellers – just VGI Partners.
"They have fundamentally misunderstood our business model," he tells AFR Weekend.
And VGI had thus far not accepted an invitation to meet them after Sunday's "ambush", Pherous says.
"They have a contrarian view and everyone is welcome to their view – that's the thing about shorting."
But if a short seller is putting out misinformation, Pherous vows to "defend ourselves swiftly and strongly".
The company's staff and its clients back the firm's rebuttal while Pherous points to reports that are "much more detailed, from investors that do understand the business".
And he laments that amid the storm, the company has lifted its profit guidance. "I don't get emotional. All I can do is run a business and it's going quite well."
It goes something like this -
Darn, I don't have a sub to the AFR so I can't read beyond a few lines. Anyone want to precis this?
For future - copy headline and search via Google. You can then open up the articles that list (yes, AFR ones!).
I am currently into regression channels and CTD has come up in my scan the other day. Entered today @ $18.26 and watching retrace to ~ $21
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