Thomas Cook (LSE: TCG) had yet another shocker in July, its share price slipping 58% during the course of the month. On this occasion, though, it wasn’t the release of chilling trading data which encouraged investors to rush for the exits. Instead, news of a major refinancing plan caused the travel operator to sink to its cheapest since first listing back in 2007.
Thomas Cook’s started off August on the front foot, however. Indeed, it’s up a mighty 30% as I type in Friday business. Could this be the start of a stunning recovery?
Turkish delight
Shares have flown in recent days as news of a much-needed cash injection from a significant Turkish investor has emerged. Neset Kockar, founder of holiday colossus Anex Tourism Group, secured a 6.71% stake in Thomas Cook on Wednesday before going shopping again yesterday. As it stands Kockar holds an 8.01% stake in the British business.
It’s not just that investors are celebrating the critical boost for Thomas Cook’s battered balance sheet. The £750m liquidity injection from its lenders and Chinese travel titan Fosun which was proposed last month would only give it sufficient liquidity to trade over the winter season.
In an internal e-mail seen by Bloomberg today, Kockar said that he believes the small-cap “has more value and potential than what is being discussed recently, particularly with the skillset and complementary capabilities Anex Tour shall put forward.”
Anex is a major player across Russian and Central and Eastern European travel markets, and investors are hoping it’ll bring some of its magic to Thomas Cook.
Flying high, or ready to crash?
Is it finally time to buy back into the UK operator? Not in my book. While the Anex and Fosun investments have put Thomas Cook on a safer financial footing, as well as bolstering the brain trust over at the business, I’m not convinced either will prove little more than a temporary sticking plaster.
Cutthroat competition among the holiday providers continues to play havoc across the sector and the number of casualties continues to grow. Just today, Malvern Group — owner of booking website LateRooms.com and operator of Superbreak Mini-Holidays — announced it had collapsed into administration. And earlier this week, Ryanair advised further fare-cutting had caused pre-tax profits to sink 21% in the three months to June.
This fight to the bottom isn’t the only factor threatening to keep revenues at Thomas Cook in the doldrums. I’m speaking, of course, about a prolonged downturn in broader consumer spending due to uncertainty over Brexit.
Besides, under that refinancing package announced last month, Thomas Cook plans to convert “a significant amount of the group’s external bank and bond debt” into equity. Even if its lenders agree to such a proposal the move will considerably dilute the holdings of its existing shareholders.
While Thomas Cook’s forward P/E multiple around 12 times might make it cheap on paper, I think the risks to investors remains far too considerable. For that reason, I’m happy to keep avoiding it.
