“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 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.
