Getting Cheaper: Thomas Cook Group plc, Royal Mail plc, Rentokil Initial plc & FirstGroup plc

Pay attention to Thomas Cook Group plc (LON:TCG), Royal Mail plc (LON:RMG), Rentokil Initial plc (LON:RTO) and FirstGroup plc (LON:FGP).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

“It is our innate urge to activity that makes the wheel go around.” — John Maynard Keynes

Investors are not willing to give credit to companies whose executives are not brave enough to tweak the corporate structure of the businesses they lead. This is the key takeaway from the last five weeks of trading. 

On The Radar

“Screening for value in the UK universe, four companies emerge: FirstGroup (LSE: FGP), Rentokil (LSE: RTO), Royal Mail (LSE: RMG) and Thomas Cook (LSE: TCG),” I wrote at the end of May.

These four companies are much cheaper today than five weeks ago. I am shaking, but I haven’t made up my mind about their long-term prospects. Their management teams should act, and swiftly, however.

From Bad To Worse?

Thomas Cook, the second-largest tour operator in Europe, is the worst performer: its stock is down 18% since May 29. Ouch. 

A turnaround story, Thomas Cook is not a bad business. It should shrink, though. Proceeds from divestments should support more profitable operations, shareholder-friendly activity and even debt redemption — or a mix of the three. 

Revenue growth isn’t forecast above UK inflation, while leverage is creeping higher. That’s why buyers should be sought for problematic assets, particularly in the UK. In late May, Thomas Cook sold its domestic corporate travel operations to Mawasem Travel & Tourism Ltd for £13.5m. Bigger divestments are needed.

TUI Travel announced last week to have agreed to merge with its majority shareholder, Germany’s TUI AG. The pressure is intensifying on Thomas Cook’s management.

Rentokil: A Restructuring Play

Rentokil stock is down 3.3% since May 29. Rentokil is a restructuring play likely to yield dividends if management are quick to divest underperforming assets.

Analysts at Royal Bank of Canada met management on Wednesday. Disposals are on the cards. According to the broker, the textiles & hygiene unit of Rentokil could fetch £700m and up to £500m could be distributed to shareholders as a special dividend.

“Rentokil has room to become a leaner machine. Last year it sold City Link parcels business for £1, which signals a commitment to divest problematic assets,” I said on May 29.

Rentokil is also considering bolt-on acquisitions around the globe. This is not the way to go before divestments take place.

royal mailRoyal Mail: Paying The IPO Price

Royal Mail stock is down 7.9% since May 29. It trades at 477p, or about 44% higher than its price of 330p at IPO.

It is getting close to 455p, i.e. the highest level it recorded on the first day of trading. Volatility in Royal Mail’s valuation is the price to pay for a business that was not properly valued when it was listed on the stock exchange. Guidance was way too low; blame the arranging banks…

“Further weakness shouldn’t be ruled out,” I said on May 29. On the one hand, the threat posed by rivals is real. On the other hand, Royal Mail is a much more efficient business, both financially and operationally, than in previous years. Its long-term prospects remain intact, in my opinion.

Its General Logistics Systems unit, a leader in ground-based parcel delivery services in Europe, is less profitable than Royal Mail’s UK operations. A separation of the two may help Royal Mail release value. 

FirstGroup: The Weakest Link 

FirstGroup stock is down 5.7% since May 29. 

FirstGroup, a transport operator in the UK and North America, is not the best pick among buses and railways operators in the UK – Go-Ahead is. Its financials aren’t exactly reassuring, although they have significantly improved in the last year or so. Bad news is priced into the stock, in my view.

FirstGroup stock currently trades well below its record highs. Revenues are under pressure and is hard to find a company with a lower interest cover ratio in the UK, but FirstGroup remains a break-up candidate as well as a takeover target, particularly if it slims down. The former is the preferred option. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro doesn't own shares in any of the companies mentioned. The Motley Fool owns shares in Tesco.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »