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It’s rare, but we have another one. A broker price target of zero pence. The stock is Thomas Cook (TCG). The broker is Citi. And there are no prizes for guessing that the analyst’s rating is Sell.
Not to draw too ugly a parallel, but the last time we saw one was with Carillion, Interserve, Patisserie Valerie and, more recently, Debenhams. All were at risk of collapsing into receivership, with shareholders getting zilch.
There is no certainty that Thomas Cook will suffer the same fate. However, Citi’s analyst on the stock is clearly bearish. Understandably so after this week’s results, which included a huge impairment (overpaid for an old acquisition), an unappetising outlook and cut to full year profits guidance and, the auditor citing “material uncertainties”.
The airline division needs to be sold soon, to secure access to financing to strengthen a debt-ridden balance sheet. No news about the airline sale was a disappointment. Management tried to reassure, suggesting it has received several credible bids since February. But credible is one thing; firm and, more importantly, sufficient is another.
While TCG shares have had a ‘mare this week (-55% to 11p; lowest since 2012), so too have its 2020 bonds, now trading at around 50% of par value. Furthermore insurance for these bonds (Credit Default Swaps) now costs a whopping 50% of the principal. This all implies financial markets pricing in significant financial risk.
A debt-for-equity swap or a highly dilutive rights issue may be on the cards, both of which would surely send the share price even further south. If successful in selling the airline, locking in fresh financing, however, might it stage a repeat of its 2013 recovery from 11p to 170p.
It’s a tough industry; competition is fierce. Several airlines have gone bust recently (e.g. Monarch, FlyBe). Buyers for the airline side of the TCG business are going to want a great deal to offset the risk they are taking. This could be at odds with the price TCG needs to get to settle investor nerves. Be it existing shareholders, or newbies hoping for a recovery play.
Some retail investors were caught off-guard this week. Some as legacy investors, holding on since way back (last May: 120p); others since picking up a hoped-for bargain at 20-40p since December through May. We’ve also spoken to investors who had no idea TCG was reporting results this week. Some had no idea of the company’s woes at all.
As an Accendo client, we make sure you know, well ahead of time, when the shares you own could be moved by results. Be it the company’s own results it those of a sector peer. We want to be sure that you are prepared.
Of course we tell you when your shares are doing well. But we never shy away from telling you when they aren’t. It’s just as, if not more, important. Missing some profits is one thing; wearing a bigger loss is very much another.
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Let’s see if Thomas Cook provides any better news for shareholders next week. Will the shares take off, giving shareholders a holiday and some respite, or are they destin-ed to remain under pressure?
While we wait – have a nice weekend.
Mike van Dulken, Head of Research, 17 May 2019
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance.Prepared by Michael van Dulken, Head of Research