Join our community of smart investors

Travel: as unpredictable as ever

Harriet Green's shock departure from Thomas Cook reaffirms the old assumption that travel is the most volatile of sectors - but could also offer risk-happy investors a buying opportunity.
December 5, 2014

Harriet Green's departure from Thomas Cook (TCG) late last month sent shockwaves through the tourism and travel sector. Ms Green had been credited with Thomas Cook's recovery story, so her sudden departure spooked investors, sending the shares down more than 20 per cent the morning she announced her exit.

At the end of 2012, Thomas Cook's financials were "horrible", as this magazine put it at the time. Reported losses totalled nearly £500m, the balance sheet was a mess and demand for its holidays limp. Ms Green's arrival in May 2012 marked the start of a turnaround for the business. Assets were sold, the proceeds used to cut debt, and costs watched with an eagle eye. The trading outlook has barely improved during her tenure, yet the share price rose from roughly 20p when she joined the board to a three-year high of 183p in February.

But a disappointing set of interim results in May revealed poor demand for winter holidays as a result of ongoing political tensions in Egypt, which knocked the share price back. There were no rumours of board tensions at the time, but Ms Green's departure has inevitably led to suggestions that her relationship with chairman Frank Meysman soured.

 

So now what? Moving into Ms Green's office with immediate effect is Peter Fankhauser, who was at Ms Green's side for most of her time with the travel firm. He has spent roughly 20 years with the group, and investors have credited him with making significant improvements to Thomas Cook's UK business.

At 120p, shares in Thomas Cook are now at a 12-month low. Based on forecasts from brokerage Jefferies, the shares trade on just eight times forward earnings for the current financial year. For the first time in a year, they look cheap. Travel firms rarely fetch premium ratings, given the volatility of their business models. But Thomas Cook's rating suggests some scope for recovery.

 

Annual Thomas Cook share price performance

 

Worth a holiday flutter?

After all, prior to the release of the group's annual results - when Ms Green chose to announce her resignation - City analysts were bullish on the group's prospects. A falling oil price will play to the company's advantage next year, lowering costs by approximately 9 per cent. Political headwinds in Russia and Egypt shouldn't worsen, and the £25m currency hit to last year's profits won't be repeated if current trends are any guide. Reflecting the success of its cost-cutting programme, management has also raised its savings target for the 2015 financial year from £460m to £500m. At this depressed price, shares in Thomas Cook could be worth a punt.

Thomas Cook isn't the only company battling tough trading in the travel sector. Dart Group (DTG), which owns the budget airline Jet2, has had a rocky 2014, too. The share price fell from 300p to 200p between May and July after the group issued a profit warning. Since then, the shares have rebounded, reflecting better trading towards the end of the summer. A black cloud for Dart is compensation payments due to customers who suffered flight delays in the past. The group has made a £17m provision against profits to cover future payouts.

In the near term, the sector faces consolidation in the form of a long-mooted merger between London-listed TUI Travel (TT.) - owner of travel company First Choice - and its German parent TUI AG. The tie-up will create the world's biggest tour operator, with a combined market value of £5.2bn. The enlarged company is likely to enter the FTSE 100 in London, while maintaining a secondary German listing.

But TUI Travel's shareholders may not be getting the best deal. They'll receive 0.399 new TUI AG shares for each share they currently hold. That suggests an offer that's worth roughly 355p a share, well below the current 431p share price, and a significant discount to the 404p share price at the end of June, when merger talks were first mooted. Overall, TUI's shareholders can expect to hold 46 per cent of the enlarged company, and will receive a bumper interim dividend worth 20.5p in lieu of a final dividend.

 

IC View:

The travel industry carries a number of risks for investors. It offers no shortage of cheap shares, but this reflects the volatility of an industry at the mercy of discretionary consumer spending, the oil price and geopolitical tensions. Growing online businesses has been tricky, too: with more customers taking matters into their own hands to hunt down the cheapest deals, high-street travel agencies are finding themselves obsolete. But the mass-market package deal that is the mainstay of Thomas Cook and TUI isn't likely to die out. The sector looks set to remain a playground for risk-loving investors for the foreseeable future.