Thomas Cook (TCGLN) is Europe’s second largest tour operator and travel agent. The group is geographically diversified with around 50% of FY14 revenues (excluding the airline business) from Continental Europe, 35% from the UK and 15% from Scandinavia. Thomas Cook has number one or two positions in the key leisure markets of Germany, the UK and Scandinavia.
Packaged holidays, where Thomas Cook sells a flight, hotel room and airport transfer, form ca. 70% of revenues, with 30% coming from tailored holidays. The business model remains for vertical integration, with the principal shift being the rapidly rising penetration of internet sales relative to the high street stores. Online sales formed 36% of total sales versus a target of 50% by 2015, with Scandinavian internet sales ca.70% of total, the UK around 37%, and parts of Central Europe only ca.10%.
On 6 March 2015, Thomas Cook Group plc, and the Chinese company Fosun International Limited announced a strategic partnership to build international cooperation across a number of business areas, with a view to accelerating Thomas Cook’s existing profitable growth strategy and creating the potential for new growth opportunities. In the context of the strategic partnership, and with a view to becoming a long term shareholder in Thomas Cook, Fosun has agreed to invest £91mn with a view to increasing its shareholding in Thomas Cook up to approximately 10% of the enlarged issued ordinary share capital
Over the course of the past 6 months, management’s focus on differentiated and flexible holidays has started to now pay off, with rapidly growing customer demand for holidays to TCGLN’s own branded concept hotels. Furthermore, the company has managed to serve its customers better through technology: improved bookings and conversion on OneWeb, substantially increased mobile sales group-wide, as well as the digital mobile “companion app” has been gaining popularity.
Having said this, in its accompanying earnings statement, management reiterated that it remains focused on implementing the next stage of the business transformation from FY16 to FY18, to transition to the New Operating Model and deliver further substantial business efficiencies. The Wave 2 initiatives form part of the New Operating Model.
TCGLN’s differentiated and exclusive holiday offering is based on its very own-brand (concept) hotels and other premium properties. Having developed in little more than two years a portfolio of 220 own-brand hotels, TCGLN is now aiming to grow bookings through better utilisation and occupancy of these properties and through an improved customer experience. Management reported that own-brand hotel bookings for Winter 2014/15 increased by 30%, and bookings to date for summer 2015 are up by 33%. The group also offer a range of ‘specialist’ holidays to address smaller but nevertheless strategically important target markets, including the long-haul and luxury markets. TCGLN has grown its presence in the long-haul market significantly in the first half, with capacity up 8% and l-f-l revenues up 12%.
TCGLN’s Q215 results are testament that the company’s path to recovery is sustainable, revenues have been steady and margins relatively stable. Despite the challenging trading conditions within core European markets, TCGLN managed to focus on its strengths in the UK and the branding of its hotels has resulted in sustainable streams of revenues. The company’s drive to increase traffic (and subsequent bookings) through its online portal is proving successful whilst the announcement earlier on this year of a possible JV to operate in the Chinese market is also evidence that the company is making inroads in increasing its product offering and diversify its geographical footprint.
Also, the news of the recently negotiated Revolving Credit Facility (RCF), with a higher amount and improved conditions must not be overseen and taken lightly. Although from a bondholder’s perspective the fact that the RCF allows for the possible distribution of dividends post FY2016 can be considered as an eye-opener, this announcement goes to show that management has shown credibility in its strategy as its creditors are now in a position to offer better financial terms on this facility. We remain positive on the credit and we take comfort on the relative resilience of the performance of TCGLN bonds of late.
Mark Vella is Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.