A renewed bout of optimism about the prospects for Thomas Cook helped to send the travel group’s share price off to considerably sunnier climes late last week. While the shares were off again yesterday, down 2½p to 52p, the stock jumped in value by a fifth over Thursday and Friday.
The shares have had an appalling year, losing more than half of their worth since January. This is mainly due to poorly received first-half earnings in May and a stinker of a profit warning in September that renewed concerns about margins and the outlook for bookings.
Thomas Cook’s balance sheet also remains under scrutiny. It is capable of deteriorating rapidly due to the nature of the travel business, where payments for holidays do not always coincide with obligations to hoteliers and other suppliers. In 2011 it issued three profit warnings and needed an eleventh-hour credit renegotiation with its banks to avert disaster.
Thomas Cook began life in 1841 as the operator of a rail trip from Leicester to Loughborough at a shilling a head. It is now one of the world’s biggest holiday companies, operating travel agencies, tours and its own airline. It has 22,000 employees and carries 20 million holidaymakers to destinations in 17 countries each year. The nature of travel means that its shares are often buffeted by wider worries. Thomas Cook is one of the five biggest airlines in Europe, so it fluctuates along with the oil price because of the knock-on effect on its fuel costs.
It is also exposed to the sentiment of tourists and whether, for example, British holidaymakers become staycationers for the year because of good weather at home, or stay away from destinations such as Turkey or Tunisia due to political worries.
The seasonality of booking means that Thomas Cook generates about 35 per cent of its earnings during the first quarter. During the year it has a series of demands on its finances, for example, having to pay the hoteliers it uses in Spain when perhaps not all of the revenue from bookings has come in. Its balance sheet is at its most stretched most Decembers.
It’s not hard to see how quickly a slowdown in bookings puts a strain on working capital and has a rapid knock-on effect on profits. Thomas Cook slashed its annual profit expectations this year from £350 million to £280 million in the space of four months, mainly due to heavy discounts on late summer bookings, though winter bookings running 2 per cent behind last year didn’t help.
Then there is the added issue of Brexit: a no-deal departure could have a potentially catastrophic impact on international flights, cross-border movement and consumer sentiment. Thomas Cook is confident that its contingency measures will ensure that tourists get to their destinations, but it can’t control whether they will want to go.
Most of these factors played a part in last week’s jump; the oil price fell and the prospect of a no-deal Brexit receded. A plan to open 20 of its own-brand hotels by the end of next year to take its portfolio to 200 echoed the strategy of its FTSE 100 rival TUI, but offered reassurance about future profits. An added impetus came from Marshall Wace reducing its short position against Thomas Cook shares, and the market quickly concluded that it had probably oversold the shares.
Trading is undeniably wobbly. The long hot spell has held back winter bookings, and there is little sign that pressure on prices will alleviate. The shares, trading at just over seven times Numis’s earnings forecast for this year, are inexpensive, but offer a prospective yield of less than 1 per cent. Thomas Cook’s financial position is considerably healthier than it was seven years ago, but TUI’s shares are probably a safer bet.
ADVICE Avoid
WHY Operating well in areas it can control but too much of its fate is out of its hands
BB Healthcare
BB Healthcare Trust reckons last month’s market sell-off is too much of an opportunity to miss. The investment trust pressed ahead with a share issue programme yesterday that could mean it raises more than its current market value over the next 12 months. It argued that the October fall in prices had a disproportionately high effect on the kinds of smaller, high-growth companies it invests in and there are stockpicking deals to be had.
BB Healthcare may actually be one itself. Its shares have lost 9 per cent since the beginning of October, against a drop of 4.5 per cent in the wider MSCI Healthcare index that it benchmarks itself against. The company is worth a closer look.
BB Healthcare was listed in December 2016 and is managed by Bellevue Asset Management, a Swiss-based group that came up with the idea of a specialist healthcare investment trust after it encountered investment constraints with an existing, much larger biotech fund.
Its brief is to invest in listed healthcare companies worldwide based on no criteria other than potential future value. It has limited itself to a maximum of 35 holdings and in practice 94 per cent of its portfolio is with American companies, hardly surprising given the entrepreneurial role of the private sector in healthcare provision with a regulator that is keen to foster innovation in treatments.
Among its largest investments is Anthem, a health insurance company formerly known as Wellpoint; Teladoc, a phone-based healthcare provider; and Illumina, a technology-driven group whose products are used in genetic analysis.
The fund tries to ensure all of its funds are invested at any one time but regularly issues new stock to fund growth, unafraid to quadruple its size in the coming years from its current £430 million. Its facility yesterday authorised it to issue as many as 345 million new shares over the next 12 months, worth a little more than £470 million, based on yesterday’s price, up 1p to 135½p.
Its strategy of investing in huge structural changes in worldwide health provision against the backdrop of our longer lives, better treatments for chronic diseases and the rise of private care is interesting.
ADVICE Buy for the long term
WHY Proven in profiting from healthcare’s structural changes