City Insider: Taking stock of travel’s big two

It may still feel bloody cold out there, but spring is undoubtedly in the air – or at least that’s what the daffodils in my garden seem to think.

UK consumers also seem to be feeling a bit perkier and summer 2013 bookings look to be solid and trending above (low) expectations.

All that miserable wet weather seems to have made most Brits determined to head abroad for a spot of sun in the next few months.

That timid upturn in consumer optimism – more on that later – seems to be slowly feeding through into the bottom line of the two major travel giants, Thomas Cook and Tui Travel.

Both have reported half decent numbers in recent weeks (in Tui Travel’s case, they are arguably more than half decent) and both seem to be in the best shape they’ve been for a good number of years.

Thomas Cook announced that UK gross margins were finally on the rise (at 22.9%) and that summer 2013 UK selling prices were up 3% although bookings were down 4%.

Tui Travel confirmed that it was experiencing “very strong” trading momentum into summer 2013 with total sales up 13% – online sales in particular seem to be powering ahead with 40% of all revenues in the UK now sourced via the internet. For both Tui and Cook the worst seems to be behind them.

In fact now seems to be the ideal time to take stock of the two travel majors and see how they’ve faired over the last four to five tumultuous years.

The table below shows comparative numbers for Tui and Cook between the autumn of 2008 (just before the full crisis was revealed) and 2012, with some estimates from the City for the likely numbers in 2013.

Obviously Tui started these volatile few years as the bigger outfit, and also ended it as the most profitable in terms of margin.

But what’s really surprising for this observer is just how comprehensively Thomas Cook has blown it over the last few years – in fact one could argue that the travel giant is a case study in how not to sustain a major world class brand.

The single most striking thing for me is that despite a precipitous collapse in profits and a balance sheet that has nearly self destructed, Thomas Cook has still grown its top line revenues by 15% over these years, although those numbers may fall back in 2013 as the pace of asset disposals picks up.

The mantra of the industry has long been to cut capacity and take out unprofitable lines yet Thomas Cook has substantially grown its revenues through a savage recession, even whilst its operating margin plummeted.

The optimist might say that Thomas Cook deserves a medal for still expanding sales, whereas the hard headed investor will simply mutter that buying sales with zippo margins is a road to ruin.

And that sorry state of affairs coincided with a remarkable turnaround/collapse in Thomas Cook’s key financial metrics.

We forget now that Thomas Cook actually had a better operating margin at the group level in 2008 compared to  Tui Travel, with a fairly decent interest cover of 4.7 times incoming cashflows, i.e it could cover its interest payments 4.7 times with available cash earnings.

That all important ratio number has collapsed to a shocking 0.65 as debt levels have hit a simply astonishing £1.55 billion. If one were to conjure up a recent financial metaphor for Thomas Cook, I’d probably opt for  that of a giant supertanker slowly inching ahead, but also slowly sinking beneath the waves as the weight (of debt) finally drags it down.

The Forward View

Luckily as well all know now, Thomas Cook didn’t sink and the good news is that we face the fascinating prospect of a possible turnaround in sentiment over the next year in the City.

The standout statistic in my book is that all those City based short sellers have now departed (largely) from Thomas Cook, with net short interest according to data from Castellian Capital, at a near term low of about 2.4%.

Obviously the short sellers have abandoned Thomas Cook as a hopeless cause largely because of that stunning share price appreciation, with the ordinary shares now trading at above 110p.

But that’s not the only interesting bit of the story – City analysts have also woken up to the recovery and decided that Thomas Cook might actually be more than a debt-addled basket case.

The table below shows the full range of City analyst views at the beginning of April, with many upgrading their investment views and most pushing up their target share price levels.

Obviously there are a few contrarians lurking around, notably Panmure Gordon’s Simon French and Investec’s James Hollins, but by and large most City analysts seem to have bought into the optimistic narrative offered up by new boss Harriet Green.

Thomas Cook Broker Views