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City Insider: Cook and Tui bring some cheer but the bears are still growling

City Insider - FT journalist David Stevenson on the travel industry



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Unless something goes terribly wrong in the next few weeks (maybe featuring an assorted cast of obstreperous US congressmen), it looks like we’ll bring the curtains down on 2012 with a small cheer.


At long last, it would appear that the UK travel sector has tentatively turned the corner, with more and more evidence coming through that suggests that the UK consumer has stopped spending less and may even be thinking of pushing the boat out in summer 2013 with a slightly more extravagant foreign holiday – let’s hope that inflation and a weakening of sterling in the FX markets doesn’t get in the way.


The full picture for the sector was revealed yesterday morning when Tui Travel reported to the market, the travel industry leader echoing Thomas Cook’s soothing words from last week.


If we’re to believe Cook’s new chief exec Harriet Green, the worst (for now at least) may be over. In fact the new boss looks to be bringing some much needed vim and vigour to the besieged group, which will no doubt make the company’s ultimate owners (the banks) more than happy.


The really great news is that it would appear that Thomas Cook is not one of those zombie companies that are allegedly clogging up the balance sheets of the big high street banks, stopping them from lending any new money.


At an underlying level Thomas Cook would even appear to be making a profit, of £156 million using the managements chosen definition of ‘underlying’ – the actual net loss was, by contrast, £37 million.


Revenue was down a bit as was the gross profit, with the gross margin steady at 22%. All in all these numbers can’t be a bad result for a company that looked like it was stumbling on the brink of failure just a short while ago.


Current trading seems to be holding up well, with the summer ending strongly and a ‘good start’ for the New Year in most major markets.


Peter Fankhauser has also hit the ground running in the UK, and  would seem to be charging ahead with an ambitious programme of ‘business transformation’ as part of a ‘stabilisation plan’ that will focus on, amongst other things, squeezing more efficiencies out of the group’s structure, rationalising the branch structure and hotels portfolio and strengthening the air proposition. 


That’s all excellent news, especially when you consider that the UK business only pulled in £1 million last year, which is an astonishingly low number for such a well known and respected national brand.


But sadly the bears will also be able to find much to grouse about in these numbers. The big structural factor that’s working against Thomas Cook (and its competitors) is the huge fuel bill which negatively hit the bottom line by £110m this year.


The bad news is that this isn’t going to get any better next year as we’ll discover when we look forward to 2013 in next month’s column – market data suggests that at the marginal level we should expect significantly higher fuel bills in 2013.


Critics might also wonder why there’s yet another business transformation plan needed – Thomas Cook is beginning to look like a poster child for management consulting and its process of continual revolution. More seriously, bears will wonder why we need a plan to harvest group synergies – what happened to the last five years of similar plans?


Most importantly the bearish cynics might compare and contrast two numbers. The interest bill for last year was up at £146 million, against the entire market capitalisation of the group at £225 million – ie. every year two thirds of the company’s market cap is being eaten up in interest.


It’s undoubtedly great news that their debt mountain has declined but personally I’d have been hoping for a bigger chunk to be taken out after those asset sales of £196 million. Clearly Thomas Cook is still struggling to control its working capital requirements.


Perhaps most ominously for the new chief, the short sellers are still on Thomas Cook’s case. If we look at market wide analysis by the likes of Data Explorers (a firm that monitors top shares being shorted by hedge funds), Thomas Cook has dropped out of its top ten lists (to be replaced by the likes of easyJet).


But once we dig deeper using alternative data sources we discover that Cook is still a favourite target for the short sellers.


Castellain Capital’s short tracker beta tool (see Thomas Cook’s data) suggests that among the funds tracked by this data researcher, Thomas Cook is still in there at Number 14, with net short interest up at 3.90% (Tui Travel’s number is much, much lower though still net short).


It’s also worth noting that although Dixons, WH Smiths and Home Retail Group (owners of Argos) may be having a worse time than Thomas Cook with the short sellers that measure of bearish sentiment has crept up significantly over the last few weeks.


So all in all Thomas Cook looks like it is stabilised and the share price has perked up in recent days but the short sellers are still circling in the equity markets.


To this observer there would appear to be what’s called asymmetric risk at Cook’s – the upside is limited by the need to push through group efficiencies to drive down the debt mountain while the downside could be any number of unexpected economic disasters that might emerge in 2013.


The Big Risks heading into 2013


As we’ve already said, we’ll look at the (positive) outlook for 2013 in next month’s column, but for now it might be worth sticking with the bears and understanding the key risk factors lurking around in the markets at the moment.


This is fairly easily gauged as most hedge funds keep a beady eye on a number of crucially important macroeconomic signals and they currently give us a fascinating and slightly binary view of the markets. 


The big message is that many investors appear to be worried that the global equity markets currently look either very complacent  or just subdued with key measures such as short selling (the put call ratio) at low levels, sustained director buying of US shares increasing and low volatility in the daily variation of share prices.


In fact according to Data Explorers latest market survey “implied volatility from options markets points towards [stockmarket] indices going up or down around 1% per day next year [2013]”. That would be a low level for recent years and it’s clear that many investors are spooked by these numbers, especially as equity trading volumes are also steadily falling.


On the positive side measures that look at the risk of a Eurozone implosion such as interbank lending rates, and liquidity measures have all improved markedly, suggesting that the traders don’t think the Euro is dead quite yet.


And there’s also strong evidence that the US housing market has bottomed out. Incredibly most US house building shares are up between 50% to 150% in value over the last year. 


But the overall bright picture is clouded by other equally closely watched signals – indices that track global shipping flows (the Baltic Dry index of bulk cargos to Asia and the New Contex index of container traffic heading the opposite way) look very sickly, in large part because the Eurozone economy as a whole looks decidedly peaky.


Key measures of German economic confidence have nosedived in recent months and data from the European commission suggests that 2013 will be a very bloody year across the continent.


For me the standout numbers come from once buoyant Netherlands, where the 2013 real GDP growth rate looks like it will be just 0.3% in 2013, yet inflation will be at 2.4% with unemployment rising to 6.1% – that’s not good news for Dutch consumers and must hit the core Eurozone businesses of both Cook and Tui Travel.


These grim numbers for the Eurozone aren’t helped by weak data from China, and markets are currently digesting a marked slowdown in corporate profits.


According to a recent report from analysts at French investment bank SG, “Global earnings momentum continues to sit around 42%, a level that historically has been consistent with declining profits growth, and for once the US reporting season has struggled to provide much of a boost. Downgrades there still exceed upgrades and in recent weeks there has been a clearly divergent trend in revisions to 2012 and 2013 numbers”.


But all this pales beside the big risk for 2013 – France. This is looking like it could be the basket case of Europe, with both the equity market bears and bond market vigilantes circling. More on that next month.

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