Langton Capital – 2015-11-25 – Daily Wrap: Thomas Cook meeting, Germany & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
Thomas Cook thoughts in brief (see also below):
• Leisure travel is a growth market and, within that market, Thomas Cook is a stable, established player
• The Fosun situation could be very interesting going forward and, despite geopolitical events buffeting the company from time to time, we believe that, on only around 10x current year earnings, the group’s shares are cheap
Thomas Cook, the analysts’ meeting:
• Following the announcement of its full year numbers this morning, Thomas Cook hosted a meeting for analysts and our comments are set out below:
• The Numbers:
• Fankhauser – TCG’s performance was good but ‘this was one of the most difficult years in my 30yrs experience in leisure travel’.
• Exceptional charges are down by £177m and the group has made its first profit after tax (of £19m) in five years
• Margins are better though there has been some inflation in bed costs. Higher margins in UK & Northern Europe were partly offset by lower margins in Airlines Germany and in Continental Europe
• Germany is ‘highly competitive’ due to excess supply. There were more holidays sold in the Lates market this year
• Tunisia cost the group around £22m. Some £61m of costs were cut as a part of the ‘cost-out’ programme
• Regional EBIT. UK £119m v £84m. Continental Europe £71m v £90m. Northern Europe £96m v £78m & Airlines Germany £56m v £47m.
• Free cash flow was £161m, year end debt was £139m (post a £92m equity injection from Fosun). Group is much more able to withstand geopolitical upheaval
• Overview, financial targets etc.:
• Group hit cost saving targets a year ahead of target & has done well in the UK business
• Group has ‘achieved a step change in financial performance’.
• Market for leisure travel remains in growth. Has grown almost every year over the last 20yrs.
• Targets going forward are simpler. Group will grow own-brand hotels + differentiated holidays. Retailing will be online & offline (omni-channel) and costs will be cut further
• Group believes it can generate c£55m of incremental operating profit by moving to differentiated holidays and own-hotels. Could earn c£25m from enhanced in-resort services. Cost out should save another £25m plus
• Fosun: Should begin trading early next year. Team is on the ground in Shanghai. This segment could be as big as existing segments (or bigger). The Club Med partnership is operational and the hotel fund is recruiting
• New operating model could bring benefits of £100m to £120m by FY18 net of costs involved & some more general cost inflation. Cash conversion should be >70%.
• Sales should grow by ‘at least’ 2% to 3% per annum
• Current trading & outlook:
• UK bookings +8% for winter 15/16 with selling prices +2%. N Europe is +7% and +9% respectively. Continent down 6% but +6% with Condor down 1% and down 1%
• Summer is ‘off to a good start’.
• Dividend pay-out should be 20% to 30% of net profits with the first dividend out of FY16 earnings – the group will not pay an interim dividend. Board will consider a step up in the pay-out ratio in due course
• Questions & Answers:
• Geographic growth going forward? Group intends to drive profits ‘in every market’.
• Put option in the hands of the Co-op re retail units? This exists & the group is providing for around £80m of costs.
• Cost of Sharm? This is ‘a low single digit figure’. Group has stopped flying. It is following government advice. It was a diminished destination post the Arab Spring in any case.
• Capex? This has risen this year & will remain high in FY16 before falling to c£160m thereafter. Most has gone into systems.
• Airline delay compensation? This has impacted profits, claim rate has hit c80% & the group will further target punctuality going forward.
• Delays in setting up hotel investment fund? Both sides committed but it is taking a little longer than expected. There won’t be any properties added in calendar 2015 but there should be income in FY16. It will be accretive from FY17.
• Group is well-financed, has optionality.
• Pension deficit? Had a triennial review. Costs should be £26m.
• Langton Comment: Over rather a long meeting, TCG was able to reassure investors that it had ‘achieved a step change in financial performance’ and, perhaps more importantly still, it insists that there is more to come.
• The group has identified credible areas of growth and has put numbers on its aspirations.
• The £100m to £120m of incremental EBIT is said to be after some costs but, as is the way of these things, there may be some further mitigating costs – or competitor reaction – that brings this number further down.
• Nonetheless, TCG seems to be firmly signalling that near term profit forecasts are achievable and that the group should be able to deliver further growth thereafter.
• We buy into the idea that leisure travel is a growth industry and see TCG as an established – and now stable – player. There have been – and probably will continue to be – external issues that cause problems from time to time but, at a single-digit multiple and with the prospect of further action re Fosun out three, Thomas Cook’s shares offer good value.
• It’s big but is it attractive?
• Heard yesterday – ‘most leisure retail offers have struggled in Germany’.
• Reminded of yesterday – Domino’s struggling in Germany.
• Reminded of this morning – AO World losing money in Germany, says lost £10m in H1 and will be investing materially in H2.
• Reminded of this morning – Thomas Cook finds German market difficult.
• So when is ‘investing materially in marketing’ actually throwing good money after bad? Genuine question.
• Whitbread has a few Costas in Germany and it’s about to invest heavily in the budget hotel market.
• At the risk of being contradicted, we believe that hotels work as well in Germany as they do elsewhere on the Continent so maybe this is a business where UK operators may belie the rule and actually make money in the country.
Random information, hopefully not all of it useless:
• Oil price showing the first bit of sustained strength for some while.
• Having said that, the price is only back to that of 2wks ago.
• Nonetheless, with Sterling down against the US$, the price of oil to UK consumers has gone up a little over the last few days.
• Other commodities back to the same old, same old. Softs down except El Nino, metals weak, etc.
• Travel stocks took a pasting yesterday but all recovering today. Whitbread looking interesting at down 3.24% Tuesday but up 3.09% at the time of writing. TCG also recovering.
• Merlin down but recovering, TCG down but recovering (markedly) etc. etc.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. M&B Analysts’ Meeting Chairman Bob Ivell described the year as one of ‘soft sales but strong profits’. Reinstatement of dividend is a big deal
a. M&B: Oct good so Nov must have been really rather poor. Shares cheap but will need to turn the vehicle around at some point.
b. M&B highlights problems caused by new entrants. The (newcomers) are snapping at heels of incumbents, M&B (and others) ‘there to be shot at’
2. TCG FY. Numbers slightly ahead of (albeit recently downwardly revised) expectations. First (real) profit after tax in five years
a. TCG FY. Says has a ‘significantly stronger balance sheet with extended maturities and new enlarged banking facilities’
b. TCG FY. No div. (some had hoped for resumption) but group says ‘dividend [is] expected to be paid in early 2017 in respect of FY16 earnings’
c. TCG FY. Seen a ‘strong performance in our UK business which increased underlying EBIT by 42% to £119 million’
d. TCG FY. Says ‘new financial year has got off to a good start with encouraging trading overall for Winter 2015/16 and Summer 2016.’
e. TCG FY. Says ‘we remain confident on delivering on our expectations for the current financial year.’
3. Britvic revenue for the 52 weeks to 25 November declined 0.6% to £1.3bn but disciplined cost management helped EPS up 11% to 46.3p
4. Caffe Nero reported to have taken three coffee shops in London from Harris & Hoole reports M+C
5. M+C Allegra suggests increase in lunchtime drinking with beer, cider + wine taking share of spend whilst soft drinks spend falls
6. Deliveroo raises further $100m to fund expansion. Represents 4th round of investment in 2yrs having raised $200m already
7. Snoozebox has launched a new room design that can transform its bedrooms into a dining, theatre or work space.
8. US citizens worldwide to be cautious in light of increased risk of terrorist attack. BA + EasyJet will not fly to Sharm until Jan 16 at the earliest.
9. Human error led to Alton Towers rollercoaster crash in June reports Merlin. Two passengers lost legs.
10. Ladbrokes’ shareholders have voted in favour of its proposed £2.2bn merger with Gala Coral.
11. Betfair H1 number. Revenues £274.4m (+15%), EBITDA +9% at £80.5m. EPS 60.3p (last year 55.0p) and 15p divi. (last year 9p)