Results from Thomas Cook and TUI Travel defy the odds.
With all this economic gloom that's surrounding us these days -- rising fuel costs, the weak value of the pound, worries about H1N1 flu for much of the year, and fears that our long-distance hols are irreparably changing our climate -- we might be forgiven for thinking that travel companies were going through a hard time. But we'd be wrong.
Thomas Cook Group (LSE: TCG), reporting Monday, beat expectations, recording a 6% growth in revenue, to £9.3bn, although adjusted pre-tax profit remained flat at £308m. Adjusted earnings per share came in at 26.4p, up 10% on last year, but that was boosted a little by there being fewer shares in circulation this year, after the company bought back £47m worth of shares during the year.
A full-year dividend of 10.75p per share will now be paid, which is again a 10% increase.
The better-than-expected results were partly due to cost savings from the 2007 acquisition of MyTravel still feeding through, although there were still some exceptional costs from the merger recorded on the books this time.
Late bookings
Bookings appear to be coming in quite late this year, which is not really surprising as it is only in the past few months of the year that signs of the end of the recession have been appearing. Thomas Cook's Chief Executive, Manny Fontenla-Novoa, told us that winter bookings are looking up, with early indications for next year being in line with expectations.
Net borrowings rose during the period though, from £356m to £619m, partly because of the later profile of bookings. And that has to be a concern, surely casting doubt on the wisdom of that earlier share buyback.
Forecasts for 2010 are likely to be raised a little in response to these results, probably suggesting a forward P/E of under 8 for next year, falling to around 7 for 2011. 2010's dividend yield forecast will probably be close to 6%.
Meanwhile, competitor TUI Travel (LSE: TT), on Tuesday reported a strong performance for the year, with results pretty much in line with expectations.
Merger benefits
While revenue was flat at £13.9bn, a 15% rise in underlying pre-tax profit, to £366m, was recorded, which was slightly ahead of the consensus forecasts of 13%. Underlying earnings per share rose 17% to 23.8p, and a dividend of 10.7p per share was declared, for a rise of 10%.
The basic figures, which include all exceptionals, are a little less impressive, with a basic loss per share of 1p. That was partly due to costs associated with the merger of First Choice during the year, but the integration of the two companies does seem to have gone successfully.
Again, net debt for the year rose, from £136m at the end of 2008 to £338m, which is quite a hefty increase. And again this was partly due to the later profile of holiday bookings.
Current forecasts for next year are probably unlikely to be revised much after these results, and they put TUI on a prospective P/E of a little under 10 (falling to 8.5 for 2011), and a dividend yield of 5%.
A strong industry
Both these sets of results show strength in the travel business that might surprise some, but we must remember that these have come after some significant consolidation in the industry, with some previously popular names having been subsumed by these two.
The travel business is probably at the most efficient it has been for a few years now. And, although I'd really like to see some focus on debt reduction in the next year or two, neither Thomas Cook nor TUI actually has very large debt levels relative to their market capitalisations of £1.8bn and £2.7bn respectively.
For anyone wanting to invest in this industry, these two travel agencies look a much better proposition than buying airline shares, and if the dark clouds of economic gloom are starting to part (even if slowly), I can see both of these companies' share prices heading in the right direction over the next couple of years.
If there's one thing we know about us Brits, it's that we do like our time in the sun.
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