Thomas Cook crashes again to six-year low

Having regularly gone from one extreme to the other over the past decade, Graeme Evans reports on the latest troubles at Thomas Cook.

With Thomas Cook shares down 70% in 2018 and even the dividend on ice, today's latest profits warning from the holidays giant caps a quite miserable year for investors.

The former blue-chip stock is now back trading where it was in late 2012, when Harriet Green was still in the early stages of her plan to rescue the historic British company from under a mountain of debt.

Her restructuring effort revived the company's fortunes and sent shares as high as 189p in early 2014 before she handed over the reins later that year to chief operating officer Peter Fankhauser.

Shares have been facing south ever since, squeezed by factors chiefly out of the company's control such as terrorist incidents, this summer's UK heatwave or Brexit uncertainty. Margins have also come under pressure from a much more competitive Spanish holiday market.

It cut forecasts as recently as September after a difficult 'lates' market, only to do so again today with £30 million of one-offs that will leave earnings for the past year at £250 million-£58 million down on a year earlier.

This has killed off the dividend, which was only restored in 2016 and accounted for £9 million in 2017 when it was increased by 20% to 0.6p a share.

Source: TradingView (*) Past performance is not a guide to future performance

While the dividend suspension will trouble many investors, particularly in light of events less than a decade ago, there were reassuring comments from Thomas Cook in relation to its balance sheet.

Net debt of £389 million was higher than previously forecast but "lenders remain supportive" and there's headroom to meet future covenant tests. Significantly, the company does not feel the need to cut investment in strategic opportunities, such as accelerating its higher margin, own-brand hotel growth.

With the company vowing to learn lessons from 2018 and do much better in its UK tour operator business in 2019, there will be investors wondering whether the stock is oversold based on a 6.5x price/earnings (PE) multiple.

Analysts at Jefferies, for example, still value Thomas Cook at 9.6x with a price target of 110p. UBS is more cautious at 60p prior to today. Much of the share price weakness has been driven by Brexit uncertainty, although so far there's been nothing to suggest that demand has fallen off a cliff.

Industry figures have been robust and easyJet said last week that forward bookings were solid, with 50% of seats sold in the first half being in line with the prior year. 

It takes a lot to stand in the way of Britons and their annual holiday and, if anything, they are more likely to opt for the certainty and peace of mind offered by a package trip.

As Fankhauser told journalists in a call this morning: "It's too early to tell if Brexit is impacting on demand." He added: "We are confident that travel plans will not be affected, even in the event of a no-deal."

The only recent trend he has noticed is that bookings are leaning towards destinations outside the EU, such as the Eastern Mediterranean.

The other positive in Thomas Cook's favour is the performance of its airline business, which grew profits by £35 million in the year to September 30 despite higher travel disruption costs. The focus in 2019 will be to consolidate this growth, although higher oil prices and potentially lower yields may hamper this.

Across the business, Thomas Cook expects to "deliver progress" on underlying EBIT this year along with lower exceptionals. It added: "Reported operating profit will be a primary focus going forward, together with free cash generation."

*Horizontal lines on charts represent levels of previous technical support and resistance.