Questor share tip: Sell Thomas Cook as clouds on the horizon

Thomas Cook
Questor says SELL

Thomas Cook Group

THOMAS COOK LON:TCG1 yesterday reported a steady picture of trading through the summer Discount Holidays © holiday season and an encouraging outlook for the winter ahead. However, Questor has serious concerns that competition might be about to get a lot more difficult in the travel sector and that leaves the shares looking increasingly exposed.

Turbulent year ends well

The 173-year-old tour operator said it expects full-year operating profits for the 12 months to the end of September to meet expectations of about 310m, as things haven t got markedly worse since the tragic killing of British tourists in Tunisia knocked around 25m from earlier profit targets. A soggy British summer has combined with a weak euro to spark a late dash for the beach and this helped sales of summer holidays to reach 91pc sold, a similar level to last year. Digging into the summer sales numbers, the average prices fell 2pc on a 2pc increase in bookings, and price cutting hints at overcapacity in the market. Thomas Cook said sales for the upcoming winter season were 39pc sold with improved pricing trends for the UK and Northern Europe, which it described as encouraging.

Price war looms

Questor is concerned because falling average prices at Thomas Cook are an outlier when compared to the rest of the sector. The two biggest budget airlines Ryanair and easyJet have been surprised by how strong pricing has been and both issued profit upgrades earlier this month. Ryanair is aggressively increasing the number of flights they have on offer this winter. Jet2, owned by Dart Group, has recently ordered 27 new Boeing 737-800 s, in a further sign of the airline s growing ambitions.

Ticket prices could come under further pressure this winter as airlines take advantage of lower fuel prices. Typically airlines use fuel hedges to remove the ups and downs in the oil price from the company profits throughout a 12-month period. Many of these hedges are now coming to an end and airlines are locking in sharply lower prices. Thomas Cook could find it difficult to fight back in this environment as its balance sheet is still unwieldy. A major capital reorganisation has taken place and net debts are expected to fall to about 300m at the end of September, down from 326m last year. However, that is high for a company with negative net assets and compared to rivals who have net cash on the balance sheet.

Value trap

The shares may look good value, trading on 10 times forecast earnings. But that rating is dependent on a 30pc recovery in profits during the next 12 months, and Questor thinks that will be incredibly hard to achieve, given the current environment. The shares have fallen by about 8pc so far this year and Questor is still of the opinion the risks to investors in this recovery story are greater than any potential rewards. The company is making progress and a tie-up with Chinese travel group Fosun might deliver benefits. However, there are now too many risks around next year s numbers to be comfortable holding the shares and we advise making for the exit.




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