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Risk Warning
12/07/2011
Investors dumped shares in Thomas Cook (TCG.L) after Europe’s second-biggest travel company warned full-year profits would be lower than hoped and launched a strategic review of the business.
Thomas Cook shares plunged 27%, or 33.5p, to 89.25p as the company blamed tough conditions in Britain and unrest in the Middle East and North Africa for the decline in trading.
The company now expects full-year earnings before interest and taxation (ebit) of £320 million pounds compared with analyst forecasts of around £380 million. It made ebit of £391 million and a £41.7 million pre-tax profit last year.
The impact of the Arab Spring has been greater than expected, the company said, ‘with our French business in particular seeing further reduced demand and lower margins during peak season for its key destinations of Egypt, Tunisia and Morocco.’
It added the continued squeeze on UK consumer spending meant ‘it is now appropriate that we revisit the effectiveness of our UK business model.' The management team, led by chief executive Manny Fontenia-Novoa, has begun a 'fundamental strategic and operational review of the business.’
The news knocked rival TUI Travel (TT.L) whose shares fell 6.4% or 14p to 208p.
The worsening trading conditions come as the Office of Fair trading examines a proposed merger between Thomas Cook’s British retail operations with those of the Co-operative Group. Thomas Cook shares have fallen all year from 207p in January. At the half-year results in May Fontenia-Novoa spoke of the challenges facing the business but said the company had put in a resilient performance and had cut costs.
Simon French of Panmure Gordon cut his target price for the shares to 120p from 178p and warned that the company could skip its final dividend. Thomas Cook paid a total of 14.5p in dividends last year, including a 10.75p final payment. So far this year it has paid an interim dividend of 3.75p.
Richard Curr, head of trading at Prime Markets, slapped a ‘sell’ recommendation on the stock, setting a target price of 100p. He said while Thomas Cook’s problems were well known, ‘what has come as a surprise is the severity of the fall in profits, and this is something that analysts will also be watching for at rival Tui Travel in its Q3 statement and results on 10 August.’
Citywire Verdict:
Any investors who took the company's warning signals seriously and sold out will be relieved. Anyone who hung on to the shares for the dividend yield (8.7% according to Reuters) will be worried by Simon French's comments. The prospect of a dividend cut is a potential irritant for unit holders in the £2.2 billion Jupiter Income fund, which has been attempting a comeback under the co-management of Anthony Nutt and Philip Matthews. It has held a 0.6% stake in Thomson Cook for a while.
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