Tuesday, 11 February 2014

Thomas Cook - belief in further value creation

In late November I wrote a review of the UK-listed travel company Thomas Cook under the title 'Thomas Cook - one of the best performing shares in Europe this year is...still interesting'.  You can find the link to that report here. 

Back then, the key aspect of the investment case to me was where investors thought the company was heading.  As I noted:

'After the big share price rises of recent months, the EV of the company is around £3bn.  If you believe the route to c. £500m ebit than this is cheap.  My instinct though is that the low-hanging fruit has been taken and it gets tougher from here.  Nevertheless, pencilling in £300m+ ebit today suggests an EV/ebit of less than x10.  That actually still suggests there is room for share price appreciation'.

The company provided an update today via an interim management statement (IMS) composed of a statement by the company's CEO Harriet Green.  It was only a couple of paragraphs long so I will reproduce it in full for completeness:

' “I am pleased to report further rapid progress delivering our strategy for sustainable profitable growth. Q1 underlying EBIT improved by £10 million to £(56) million. On a last 12 months basis, to place the quarter in an annual context and reconcile with our targets, underlying EBIT is up 36% to £274 million. Our Q1 results, new product revenue growth, web integration, cost out and profit improvement programmes combined with an intense business focus and financial discipline, all underpinned by the Thomas Cook Business System, give us confidence of achieving our targets and delivering even more value in the years to come.” '

Now, a na├»ve extrapolation of the £10m improvement seen in the Q1 numbers across the full year (year ending 30th September 2014) for the company suggests an ebit increase to £314m.  As noted in my November report - as the share price is little changed from the end of November level I wrote my first report at - this is equivalent to an EV/ebit of just under x10. 

I noted back in November that the turnaround does get harder now but there are some real opportunities still to aim at.  As per the IMS today: 'delivering even more value in the years to come'.  The consumer backdrop is unlikely to remain easy but I think the company specifics at least counter that.  I note the increased importance of the c. 165p resistance/support point on the chart above.  All other things being equal I am going to buy a few shares 'on a bad day' sub 170p. 

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