Shares in holiday firms Thomas Cook (TCG) and TUI (TUI) are heading in different directions after the former unveiled a strategic review for its airline division, while the latter shocked the market with a profit warning.

On Wednesday evening, TUI warned on profits, blaming overcapacity and the impact of a weaker pound on the purchasing power of UK holidaymakers.

TUI also ditched its guidance of at least 10% compound annual growth rate in underlying EBITA (earnings before interest, tax and amortisation) for the three years to September 2020, prompting a 15.9% fall in the shares to 995.8p.

‘Although the downgrade to growth expectations highlights the volatility in the industry, we believe the underlying thesis remains unchanged with holiday experiences set to increase to 70% in 2020 against just 40% back in 2015,’ comments Shore Capital’s Greg Johnson.

WHY IS THOMAS COOK’S AIRLINE DIVISION UNDER REVIEW?

Under its current strategy, Thomas Cook is keen to strengthen its own-brand hotel portfolio and make the business more efficient.

One of the ways it could improve the business is by using funds from selling the airline division to invest in its higher-margin hotels business.

Over the last year, the holiday specialist has encountered several issues, including consumer demand for sunshine package holidays being stifled by a scorching summer.

The disappointing trading has not been helped by concerns over the state of the balance sheet. In a research note late last year, Berenberg argues free cash flow is weak, which means Thomas Cook may have to raise money from investors.

ADDRESSING BALANCE SHEET WOES

These issues have taken a heavy toll on Thomas Cook’s share price as the stock has tumbled 72.2% to 34.8p over the last 12 months, even taking into account a 12% rally today as investors responded positively to the proposed review.

‘This review, which could result in a sale of the division, is an acknowledgement that the company needs to take radical action to steady its performance and repair a fragile looking balance sheet,’ says AJ Bell’s Russ Mould.

Alongside Thomas Cook’s strategic review announcement was a trading update, which revealed consumer uncertainty is weighing on bookings for this summer.

In the first quarter to 31 December, like-for-like sales rose 1% to £1.6bn as strong customer demand for Turkey and North Africa offset lower demand for destinations in Spain.


Issue Date: 07 Feb 2019