When Peter Fankhauser, the Thomas Cook chief executive, described 2018 as “a disappointing year” for the company in Tuesday’s unscheduled trading update he wasn’t joking. Just how disappointing was laid bare yesterday when the venerable 177-year-old travel group reported a post-tax annual loss of £163 million (Dominic Walsh writes).
While the £30 million underlying profits downgrade to £250 million was the focus of this week’s profit warning, yesterday the issue of exceptional or separately disclosed items was highlighted by analysts. The post-tax loss was due to one-offs of £145 million.
One possible explanation for the unusually long list of exceptionals is the basing of internal bonus targets on underlying, rather than reported, profits increasing the temptation to categorise all manner of sois-disant one-offs under exceptionals.
The downgrade that led to the latest profit warning was partly a symptom of the more conservative approach of Sten Daugaard, who has just become interim chief financial officer. The Dane admitted on Tuesday that he had closely scrutinised the balance sheet and profit and loss account and had taken “an extra look” at the scale of the exceptionals. It is worth repeating what he told The Times.
“The issue with the exceptionals is that they are not connected to a specific accounting standard,” he said. “What you put into exceptionals is to a large extent judgmental.
“We looked at the basis of how this company has been doing that and out of this review came a number of exceptionals that we felt could not really be defended.”
Thomas Cook is not alone in having become addicted to exceptionals. Like TUI Group, its FTSE 100 rival, the company was spawned by a merger — in 2007 it tied the knot with MyTravel. The point of such mergers is to make cost savings and synergies to create a leaner, more efficient organisation. The problem with Thomas Cook is that it seems to have become addicted to the practice.
If one good thing has come out of this week’s profit warning, it is that “reported operating profit will be a primary focus going forward, together with free cash generation”. That includes a redrafting of the company’s bonus scheme to ensure it no longer rewards underlying profits.
Other areas of concern in the full-year results included the ballooning of its net debt from a consensus of £267 million to £349 million driven by more of those “non-cash items” and the decision to scrap the final dividend. Neither sends a good message, especially for a company that came so close to collapsing under the weight of its debts seven years ago after a cash crunch.
In pure trading terms, the picture is more straightforward. Blaming the weather may seem like a cop-out but when your potential customers can sit at home watching England playing in the World Cup, what’s the incentive to go on holiday?
In the circumstances, underlying revenue growth of 6 per cent to £9.58 billion wasn’t bad, while there will have been relief that it was driven by a return in popularity of Turkey, Tunisia and Egypt, which grew by a combined £545 million. The problem was the heavy discounting in the so-called lates market as tour operators scrambled to offload their unsold packages.
Mr Fankhauser admitted that he underestimated how bad things could get, as demonstrated by three profit downgrades since the end of July. Having cut capacity for next summer, I suspect that it is not a mistake the Thomas Cook boss will make again.
ADVICE Buy
WHY The shares are down 72 per cent to only 33¾p over the past year, suggesting it might go bust. It won’t
Intu Properties
What a mess. That is all one can really say about Intu Properties, Britain’s biggest shopping centre management company, at the moment (Deirdre Hipwell writes).
First of all, in April it was jilted at the altar by Hammerson, its rival, which fell foul of its shareholders over its plan to merge with Intu in a £3.4 billion deal. Having weathered that rejection, hopes rose when John Whittaker, the tycoon behind Peel Group and the largest shareholder in Intu, teamed up with Brookfield Properties, of Canada, and Olayan Group, of Saudi Arabia, to take Intu private. After weeks of due diligence, this consortium also decided against following through with its £2.9 billion approach.
Once again Intu has failed to seal a union and is looking desperately alone with a share price that has fallen from 247¼p to 114½p a share — well below its net asset value of 344p — since news of Hammerson’s mooted deal emerged in December.
While Intu may have some of the best shopping centres in Britain, including the Trafford Centre in Manchester and the Metro Centre in Gateshead, and an occupancy rate of 97 per cent, it is operating in a market where retail values are falling and retailers want fewer stores at lower rents as online shopping soars.
The retail market is changing and Intu, which has £3.45 billion of debt maturing between now and 2023, needs to continue to invest in its centres to attract shoppers and retailers and find alternative uses for redundant space in large centres.
The group also needs to find a new chief executive as David Fischel plans to step down. Its options now seem somewhat limited.
It could consider a rights issue, which seems unlikely, or sell several of its more marginal centres, which seems more probable. Or it could hope to find another party either willing to invest in the business — perhaps buying out Mr Whittaker’s majority shareholding — or take it over entirely.
Only time will tell what option it goes for but as a stock pick Intu is not a plum option at the moment. Its share price is only going to remain under pressure and it is having to slash its dividend to preserve cash to invest in shopping centres.
ADVICE Avoid
WHY Intu will be in doldrums for some time to come
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