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Thomas Cook improves margins

BROKERS' VIEWS: Cost-cutting is helping Thomas Cook (TCM) offset the impact of ongoing civil unrest in Egypt.
April 1, 2014

What's new:

• Civil unrest in Egypt has depressed trade

• Prices under pressure

• Cost-cutting continues to boost margins

IC TIP: Buy at 178p

Political unrest in Egypt has weighed on winter bookings at Thomas Cook (TCM). The tour operator reported in a second-quarter trading update that bookings for the five-and-a-half months to 15 March were down 4 per cent compared with the previous year, with prices only marginally higher.

Broadening the product range and offering more "winter sun destinations" has been a top priority at Thomas Cook over the past year. But prices in the UK have come under pressure as travellers have avoided turbulent regions in favour of shorter holidays in more traditional and competitive markets. In continental Europe, meanwhile, the group has maintained its pricing power by shrinking capacity, particularly for low-margin holidays.

Mercifully, cost-cutting and so-called 'yield management' have boosted margins, says management, so the bottom line will perform better than the top. The summer season may also prove better than the winter one, with 50 per cent of places already sold - 1 percentage point more than this time last year - and overall bookings 2 per cent higher.

Thomas Cook has been experimenting with new products: management reports that bookings at its higher-margin 'concept hotels' are up 49 per cent on last year. But cost-cutting remains high on the agenda as the group continues to find its way back from the brink.

Panmure Gordon says...

Buy. We retain our ahead-of-consensus forecasts as summer 2014 trading is showing an improving trend. Gross-margin improvement is expected to be ahead of average selling prices, which we feel is particularly encouraging, and cost-cutting and profit improvement targets are ahead of schedule. We expect trading to accelerate this year as higher-margin products become a bigger proportion of sales in the UK market. Similarly, comparative figures will start to ease later in the year as the group will trade against last year's extremely warm weather in western Europe, which had a negative impact on bookings. Expect EPS of 12.9p for the year to 30 September 2014.

Numis says...

Hold. Thomas Cook's second-quarter figures read well. The winter season is described as satisfactory, despite significant market disruption. The outlook statement is positive, with the group claiming new product development is progressing well; bookings at its higher-margin concept hotels are significantly up on last year. We would expect today's positive update to fuel short-term momentum in the shares in the run-up to the half-year results in May, but await further details on the new products as well as on the second wave of plans to improve profitability. We expect EPS of 11.2p this year, rising to 16.2p in fiscal 2015.