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After several negotiation sessions with Chinese Fosun and TCG’s lending banks and noteholders to raise an additional facility of £200m, on top of the previously announced rescue plan, failed to result in an agreement, Thomas Cook has applied for compulsory liquidation this morning. At this stage, we believe there is no further interest in following the company.
Thomas Cook Group
TCG updated this morning that it has agreed key commercial terms with Chinese Fosun, the company’s main lending banks and noteholders. However, the rescue plan could result in the cancellation of the company’s listing.
TCG has confirmed that the group is in talks with its largest Chinese shareholder and business partner, Fosun, to sell its tour operator business separately after announcing the sale of its airline business. Selling separately its two businesses may be the best way to maximise value for all stakeholders at the current stage.
The group’s activities (especially Tour Operator) have continued to be impacted by the tougher pricing environment resulting from the stiffer market competition and the uncertain consumer environment during the first half of the year. And these trends will continue for the rest of the year. Therefore, management has guided that the underlying operating profit in H2 will be lower than in the same period last year, which implies that the FY underlying operating profit will be at least 35% lower than current consensus expectations.
Thomas cook has issued its third profit warning. FY 18 underlying EBIT has declined to £250m, which was £30m lower than the previous downgraded guidance and £58m lower than last year’s on a lfl basis. The annual loss after tax was £163m, which is £154m lower than last year’s on a lfl basis. Management has decided to suspend the FY 18 dividend.
Due to the tougher competitive environment and the prolonged hot weather period which should continue to impact winter trading, TCG has cut its FY18 operating profit expectations to around £280m, which is 13% lower than the current consensus expectations.
Q3 revenue came in at £2.48bn (+10% yoy), underlying operating profit was £443m (-3% yoy) with a gross margin decline of 240bp. Summer FY 18 bookings up 11%, mainly supported by the increasing capacity in Airline in Germany but offset by the lower package holiday booking due to the hot weather as expected. Outlook 2018 updated: Thomas cook now expects the growth in FY underlying operating profit to be in the lowest range of market expectations. The mid-term outlook remains unchanged.
The improved H1 figures were mainly driven by the strong Airline performance and increasing demand for summer holidays with significant growth to Egypt and Turkey. However, the margin remains under pressure due to cost inflation and oversupply in the UK.
Thomas Cook Flash : Solid Summer bookings but UK margin caution
Our FY18/19 EPS forecasts come down 9% following FY17 prelims yesterday, driven by higher tax and interest guidance. Our EBIT estimates are unchanged, but with a very different mix (table below). Our TP moves to 110p (from 115p) on an unchanged 10x FY18 EPS multiple and we stay at HOLD, recently upgraded from SELL. The positive rationale for that change was ratified yesterday: 1) Condor recovery on track; 2) group EBIT expectations stable; and 3) product strategy progress. The chief reason for not turning constructive - that UK margins have peaked - was also ratified, albeit more dramatically than anticipated given the scale of the UK slowdown. The debt refinance suggests an EPS kicker from lower fixed-term debt is not imminent. Leaky bucket. Higher tax rate guidance of 25% (PGe 20% before) and higher interest costs following a debt refinance push our FY18/19 EPS forecasts down by 9%. We now assume marginal profit growth in Nordics and Continental Europe, following strong performances in Summer 2017 and positive momentum. Condor recovery is progressing well and we now model £37m EBIT improvement by FY18 (vs. previous £35m target). The biggest change is a softer UK, where FY17 margins came in at 4.5%, some 170bp down on FY16 (PGe flat before). We now assume a modest EBIT recovery to £119m in FY18 (£111m in FY17) and 4.7% margin reflecting that some headwinds i) go away (illness claims, Hurricane disruption), ii) are easing (broadening destination mix as Turkey recovers), iii) are stubborn (Spain hotels asking for 10% pricing), and iv) turn into tailwinds (industry capacity easing, helped by Monarch, Ryanair disruption).
FY17 is in-line, with confidence in FY18 expectations. Momentum in Condor and Continental Europe is encouraging, but UK profits and margins are down and commentary is more cautious than we would like to see given the challenging macro backdrop. Presentation 9am. HOLD.
H2 revenues were +17.0% yoy. Underlying EBIT came in at +7.6%, in line with expectations, with a 10.5% margin (+130bp vs. H2 16). Guidance on 2018: “well-positioned to achieve current market expectations.” It expects the improvement in the airlines’ performance to continue; Continental and Northern Europe should remain strong; initiatives taken to get the UK back to profitable growth.
Summer 2017 has closed out in line with Q3, supporting FY17 EBIT market expectations. The ‘news’ today is twofold: 1) the well-respected CFO is retiring, and 2) new strategic partnership to expand own brand hotels. Stabilising expectations has driven strong share price recovery this year, preventing us becoming more constructive on the equity. We find the valuation too full as the market looks for a more testing 9% EBIT growth in FY18. Our TP increases to 100p and we stay at SELL.
TCG’s pre-close trading update was consistent with expectations. Guidance has been confirmed: underlying profit for the year in line with current market expectations.
We see the new Expedia deal as a natural step in tidying up the tail of TCG’s undifferentiated hotel offering, allowing management to focus on the core, higher margin, differentiated holiday product. Analyst/investor call 8:30am. We preview the pre-close update due on 26 September.
Q3 revenue was £2.3bn (lfl +15.5%). The underlying EBIT came in at £19m (vs. £2m in Q3 16). Summer bookings grew by 11% yoy and 82% of the programme has been sold so far (2% ahead of last year), driven by Continental Europe. UK bookings rose 6% (but lagged other countries). Guidance: underlying profit for the year is in line with market forecasts.
Summer bookings are holding up well and Condor’s initial recovery is expected to deliver much of the LFL EBIT growth required in Q4 to meet £326m FY17 consensus. FY18 will present fresh challenges for the UK business, as hedged hotel benefits fade, potentially offset by a broadening destination mix, which could avoid a repeat of this year’s Western Med pinch points. Our SELL rating reflects concern that UK/Nordics margins have peaked and the valuation already baking in a recovery multiple. Conference call 8:30am.
TCG is making positive progress in developing a more focused, capital light, holiday product – in evidence throughout this week’s investor trip to Rhodes. We retain a cautious sector stance on the tour operators (supply pressures, peak UK/Nordic margins) but take some solace that destination mix is starting to recover from last year’s hiatus, with Greece coming back well and Turkey (and even Egypt) showing signs of inflection.
Our FY17-19 forecasts are substantially unchanged post interim results. Summer bookings are generally steady and Condor’s initial recovery is expected to deliver much of the c£25m LFL EBIT growth required in H2 to meet £325m FY17 consensus (given £2m LFL in H1 and FX headwind of £11m). FY18 will present fresh challenges for the UK business, as hedged hotel benefits fade, potentially offset by a broadening destination mix, which could avoid a repeat of this year’s Western Med pinch points. Our SELL rating reflects concern that UK/Nordics margins have peaked, and Condor targets look stretching.
LFL EBIT was flat in H1 and Summer trading remains resilient, particularly in the UK and Nordics. Management expects FY performance to be in line with current market expectations. There is no mention/evidence of increasing UK caution, as there was with TUI – although we expect margins have peaked. Our SELL rating reflects caution on margins and that NOM benefits may undershoot targets. The 50%+ rally post-UK referendum leaves the risk/reward skewed to the downside, in our view. Presentation 9am.
Summer bookings +10% is an encouraging position for this time of the year (programme 42% sold), albeit against soft comps. UK and Nordics trading is brisk, but we struggle to see upside to last year’s peak margins. Continental European margins are down YoY. Management expects FY performance to be in line with current market expectations. The shares feel fully priced to us and a 50%+ rally post-Brexit leaves the risk/reward skewed to the downside, hence our SELL rec. Conference call 8:30am.
Summer bookings +9% with flat pricing is a reasonable position for this time of the year (programme 31% sold) although early bookings strength in the UK has waned, which needs to be monitored given increased onus on margins, already running at all-time highs. The Q1 loss is ‘in line’ and managements expect FY performance to be in line with current market expectations. The shares feel fully priced to us and a 50%+ rally post-Brexit leaves the risk/reward skewed to the downside. SELL. Conference call 8:30am.
Figures in line with expectations but overcapacity in Spanish island resorts reduce visibility Thomas Cook started the FY16/17 year by reporting sales growth in line with our expectations. Sales were up 1%, fuelled by holidays to Greece, Spain and long-haul destinations. Own-brand hotels (10 new hotels due to be open for the Summer 17) and the selected partner strategy contributed to the +10bp improvement in the gross margin (+22.1%) with the seasonal EBIT loss reducing slightly yoy (by £1m to £49m) in this quieter quarter. In December, TCG issued a €750m bond (at 6.25% coupon, i.e. 150bp lower than the two bonds it replaces, maturing June 2022) with the next maturity of €800m (bank facility) postponed to 2018. But the statement was marked by a cautious stance for the rest of the year, adopted by management, warning about the uncertain political and economy outlook. Broadly positive winter season, Condor continued to feel the pain of tight competition in Germany With 82% of the programme sold to date (at par with Q1 16), bookings were up 1% (+5% excluding Turkey), offset by a 1% drop in prices, attributable to the tense price environment in the airline market. Bookings reflect the strong demand for Spain, several long-haul destinations (Dominican Republic), making up for the continued shift away from Turkish destinations. The Winter season benefited from strong UK (bookings up +5%), reflecting growing demand for package holidays (+9%, prices up +4%) and seat-only sales (+9%). Continental Europe (bookings down 3%, poor demand from Germany and Belgium for Turkey) improved slightly (differentiated products are behind the 2% rise in prices) and limited the damages caused by the loss-making Condor (German Airline, c.17% of sales, bookings down 1%, capacity cut of 5%, prices down 1%) which has been hampered by the intense competition in the German market (overcapacity in the Canaries in particular). The business has been under restructuring measures, the benefits of which are due to come through from H2 17. UK bookings coming under pressure from rivals in the Spanish island resorts At this early stage of the booking cycle, the Summer 17 season showed encouraging trading with bookings up 9% and prices in line with Q1 16. 31% of the programme is sold to date (2% above last year). The group counts on popular Greece, which is its “stand-out” destination (bookings up 40% in Q1 17, c.2.5m holidaymakers) along with smaller destinations in Europe (Cyprus, Bulgaria, Portugal and Croatia) to compensate for the weak demand for Turkey and Egypt for the key summer season. Current trading for the summer season is encouraging and was in line with expectations. Prices are holding tight in Continental Europe and Northern Europe and particularly in the UK (bookings up 1%, prices +2%). But the UK market may be hampered by the intensifying competition seen in Spanish islands (Majorca and the Canaries in particular), translating into a mix of hotel price inflation (up to 6-8% rise after surging demand last year) and increased air capacity. This pushed TCG to focus further on more profitable destinations and quality holidays rather than chasing volumes in the UK market (bookings up 1% overall). This is behind the slight drop in UK charter risk holiday bookings compared to last year while prices are up 9%.
Strong underlying business in FY15/16 despite the fallout from terrorist activity TCG ended the year by producing sales broadly in line with FY15 (including FX tailwinds), showing a limited decrease (-0.3% reported, -4.5% lfl) in the light of the tough trading in Turkey (-7.4% impact), Egypt (-2%) and Tunisia (-1.3%) which were offset by a reactive shift of capacity to alternative and popular destinations (Spain in particular, +2.2% impact), including long-haul (+2.3%, including the US, Mexico, Cuba and Dominican Republic) while FX was also supportive (+5.9%). The underlying gross margin was up 80bp to over 23% with underlying EBIT at £308m, £3m ahead of the guidance issued as part of the Q3 16 results but £41m below last year’s due to Condor being weak (-470bp yoy) and the impact of terrorism in Belgium (-€10m impact on the underlying group EBIT at €308m). The UK (EBIT margin at 6.4%, +150bp) and Continental Europe (EBIT margin at 11%, +180bp) delivered record underlying EBIT margins despite a challenging Condor (EBIT margin from 5.1% to -0.8%), the group’s German airline (15.4% of group sales) which was heavily impacted by weak demand (disruption to key destinations and increasing competition over fewer routes). For the second year in a row, TCG showed a modest but positive net profit of £9m and a restart of the dividend policy (with a symbolic ordinary dividend at £0.005 per share) after five years of interruption. Encouraging winter trading and rebooting dividend Current trading is encouraging with 61% of the winter programme sold, slightly higher than last year. Group bookings are up 2% but pricing is down 2% given the tough comps from the UK and Northern European businesses. The UK business continues to perform well on the back of the expanded winter sun programme (new long-haul destinations including Cape Town and Tobago). Northern Europe should continue to be dragged down by the poor demand in Germany, and impacted by Turkey (-5% in bookings), while Condor is still hampered by poor yields due to overcapacity and weak demand. But differentiated and long-haul holidays experienced a 5% rise in prices. Summer 2017 shows strong pricing overall and bookings ahead of last year, despite being early in the booking cycle.
Thomas Cook reported its Q3 16 results: - Revenue was down 8% lfl with the impact of weak demand for Turkey (-8%), Tunisia and Egypt, which was partially offset by Spain and other destinations like the US and Cuba. Overall, the impact of the Brussels terrorist attack on Belgium is estimated to be £60m (-3%). - EBIT declined to £2m (vs £24m in Q3 15) due to the impact of the Belgian terrorist attacks and difficulties at Condor (German airline). - Summer 2016 bookings decreased 5% due to Turkey (+8% excluding Turkey, +6% in H1 16), 81% of packages are sold but prices declined (-3%). - Management downgraded its FY16 EBIT guidance from £310-335m to £300m (including a £32m forex impact).
TCG is feeling the pain of the terrorist activity Thomas Cook last week reported its H1-16 results which were short of the the consensus and our expectations. The FY16 guidance has been revised down to the bottom end of expectations. As a result of the terrorist attacks in Turkey, Tunisia and Brussels, TCG warned that Summer 16 bookings (63% sold, -2% yoy) had fallen by 5% (up to 10% for Continental Europe, -6% in Germany). Demand for Turkey, Tunisia and Egypt has collapsed. Overall, the pricing pattern is negative yoy (except for differentiated holidays, in the UK notably) while the collapse in demand for Turkey has resulted in later bookings for the destination. Summer bookings on average have been made almost two weeks later than last year. Since TCG has been prioritising margins over volumes, the Group cut capacity by 4% at Group level. Strong Mediterranean destinations have not yet fully offset weak demand for Turkey Excluding these problematic destinations, demand for Spain (summer 16 bookings were up 14% yoy in the Balearics) and the Canaries (+23%) but also the US (+29%) and the Caribbean (Cuba and Mexico) soared while, excluding Turkey, bookings were up 6% yoy and 13% excluding Turkey, Egypt and Tunisia. The long-haul programme (bookings up 19% in the UK) has also been helpful in mitigaging the impact of North Africa along with the seat-only offering, although the latter has lower average selling prices than package holidays.
+Underlying demand in most source markets remained strong+ In Q1 16, revenues were up by 1% to £1.4bn (but -7.2% reported), largely driven by differentiated products (own-brands hotels up 24%) and the UK and Northern Europe while Continental Europe and Airlines Germany proved challenging. While TCH has been pushing for higher-quality packages, the gross margin improved by 20bp lfl in Q1 16. And the operating loss was cut by 11% to £16m, largely driven by the UK (-21% seasonal loss yoy). Management reiterated its confidence in repeating its FY15 profit guidance in 2016. +Popular winter sun business and upmarket package holidays+ The winter season (82% sold to date) experienced a 2% drop in volumes but margins went up, backed by higher prices (+4%). The UK benefited strongly from a successful winter sun strategy, particularly to long-haul destinations, with both charter risk and seat-only pricing up by 10%. In Continental Europe, seasonal loss expanded by £6m (reflecting a 90bp drop in the gross margin), resulting from overcapacity and weakening consumer confidence, impacting particularly Germany and Condor, TCG’s German airline (tough comps, -£7m drop in EBIT yoy). The latter was weakened by competitive pressure and weak demand in short- and medium-haul markets, despite the strong growth seen in long-haul destinations. However, France and Russia proved resilient despite economic downturns. + Geopolitical incidents disrupted the strong start to summer 2016, resulting in a 3% capacity cut for the season+ For the summer 2016 season, margins are up yoy and 29% of the programme is sold (2% lower than Q1 15). The recent geopolitical shocks (Tunisia, Paris, Egypt and Turkey) have disrupted the strong start of the season, impacting customer confidence and leading to a later booking pattern, with holidaymakers postponing their holidays. The group has been giving priority to margins rather than volumes. Pricing remains positive for package holidays in Northern Europe (+6%) and the UK (+4%, UK online sales up by 7% ytd). This was attenuated by a tough Continental Europe and Airlines Germany. The latter is highly competitive and has been affected by structural market and customer confidence issues. At the group level, summer 2016 bookings slipped by 5%, mainly attributable to the 3% capacity reduction. But despite the late booking market, TCG has been counting on a recovery in demand to maintain a good price level. Recent weeks of trading have pointed to a recovery in consumer confidence across almost all source markets.
Trading has progressed well over the Summer with UK and Northern Europe being particularly strong, offsetting continued challenges in Continental Europe. Overall 91% capacity sold with guidance unchanged since the reset in Q3. Looking forward, Winter 2015/2016 trading has started positively and is already a third sold with improved pricing. Also encouraging is the 38% increase in bookings to own branded hotels and 30% increase in bookings through its OneWeb platform thus providing evidence of the transformation towards exclusive content which bodes well for future price and margin progression. Additionally the company is still on track for the Fosun JV to become operational by the end of 2015 and will give a more detailed update on this and the hotel investment fund in November. We reiterate our Buy given the low valuation.
Q3 15 group revenues grew by 0.2% LFL (-12% reported), hit by FX moves and a later booking profile (in Germany in particular) and weaker demand, as already highlighted in H1 15. Summer 2015 trends were impacted by terrorist events in Tunisia and macro issues in Greece and came below our expectations with a respective 1% and 3% slip in bookings in the UK and Continental Europe, while pricing power remained low in these regions (-1% in rates in the UK, flat in CE). Northern Europe was better (flat volumes, +2% in rates), as was Airlines Germany (+8% in bookings) which benefited from increased capacity (+7%) but prices remained weak (+1%) in the light of lower fuel prices. The group was well hedged and has passed this on to customers. For information, fuel-related costs were £820m in 2014 while TCG expects to be more than £200m less in FY16. Underlying EBIT improved by £5m LFL to £30m resulting from improved operating performances in every market (EBIT +7% LFL in the UK), except for Airlines Germany (tough comps) and also from cost efficiencies (-2% LFL). The underlying EBIT margin remained flat in Q3 to 1.5% yoy but rose from 3.4% to 4.1% over the last 12 months. Reported EBIT turned from a £42m loss last year to a £3m profit in Q3. We anticipate that in Q4 15, efforts that are currently being made by TCG on the operating front should help the group to attenuate the impact of the poor summer 2015 demand after recent terrorist attacks in Tunisia (15,000 holidaymakers were repatriated on c.60 flights) and the political and economic issues in Greece. The latter will impact FY15 EBIT by around £25m (o/w £20m due to Tunisia, £5m due to Greece). The group warned that if Foreign Office advice remains negative and if demand does not return to a normal level, then FY16 figures were likely to be impacted, without indicating the magnitude of the loss on profits. Sales to Tunisian holidays have been suspended until February 2016 (TCG counts c.14 branded hotels in Tunisia). Also, TCG said that unfavourable FX movements (the appreciation of sterling against the euro and the Swedish krona) should cut FY15 EBIT by £39m (vs £25m assumed in H1 15).
Thomas Cook extends its relationship with the Chinese conglomerate Fosun International by locking a three-year partnership with the French resorts business Club Med to cover Europe. The agreement should allow Thomas Cook to generate €100m of annual sales of Club Med holidays through its various channels by 2018. It will also allow TCG to enhance its offering by providing customers with upmarket holidays and benefit from the strong appeal of Club Med’s brand across a wider geographic area. As regards Club Med, it expects to fuel its sales and beef up its business expansion in Europe by tapping into Thomas Cook’s sales channels across its European markets and extend its customer base from countries including the UK, Germany, Russia, Poland and the Czech Republic. The partnership underlies joint distribution and marketing initiatives, including the setup of a Club Med “Digital corner” on the Thomas Cook websites and also Club Med corners in Thomas Cook's high-street agencies. The two groups are also looking for closer ties, notably joining initiatives on transport by considering short- and long-haul destinations along with ski destinations to be offered by both companies.
