Thomas Cook in profit, but terror risk remains

For the first time in five years, Thomas Cook is profitable after paying its tax bill. Strength in its UK and Northern European operations drove performance in the 12 months to September, and winter bookings are being snapped up faster than last year.

The precise impact of the recent tragic events in France, Egypt, Tunisia and elsewhere is, as yet, unknown, but investors are prepared to back Cook, today at least, and the shares are up 11%.

Although revenue slid 9% to £7.8 billion, on a like-for-like basis sales rose by £86 million. Underlying operating profit dipped 4% to £310 million, but a better product mix and its "Cost Out and Profit Improvement" programme generated a pre-tax profit of £50 million versus a £114 million loss last year. After tax, Cook made £19 million.

The summer programme shut up shop at the end of October with the season 91% sold, in line with last year. Back in September, the group said trading was going well - despite the tragic events in Tunisia and the Greek crisis potentially leaving a £25 million hole in earnings.

The winter season is edging ahead of 2014 and is 58% sold across the group. Not only are bookings 1% ahead of last year, but prices are up 3%, too, thanks to strong performances in the UK and Northern Europe.

Zoning in on the UK, further ramping-up of its long haul activities has pushed winter bookings up 8% and the average selling price up 2%. It's why routes to North America, Mexico and the Canaries have higher capacity and stronger load factors.

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Northern Europe's bookings and prices are up 7% and 9% respectively, but pressures in Continental Europe caused a 6% decline and lower margins. Although fuel costs fell by around £100 million, the benefits were largely offset by a stronger dollar - although some of it funded lower prices. 

With nearly a quarter of summer 2016 bookings already sold, the outlook is good and new boss Peter Fankhauser is clearly making his mark, announcing plans for a new operating model to be implemented over the next three years.

If successful, Thomas Cook will increase sales in-line with the European leisure travel market (around 2-3% a year), improve operating profit by £100-120 million, achieve a minimum 70% annual cash conversion and reduce fixed-term debt by at least £300 million.

And it's confident a focus on own-brand hotels and flights will help meet 2018 targets. A £100 million investment programme to refurbish over 60 planes has just been completed and an improved web platform has already increased conversion. Management targets another £110 million of extra savings, on top of the £400 million achieved in the last three years.

Growth despite a 'fragile geopolitical environment'

Obviously exposed to geopolitical events, Thomas Cook had to suspend flights to Sharm-El-Sheikh, Egypt, in early November and the group's Tunisian programme is still largely suspended. In September, Cook predicted a £25 million hit to earnings.

"Despite the fragile geopolitical environment, our business has continued to grow," says Cook. "Demand for our differentiated holidays is increasing, we are making continuous improvements to our holiday portfolio, and we are becoming more efficient.

"Our new operating model, together with a renewed focus on our customers, marks a new phase of transformation for Thomas Cook, which we anticipate will deliver long-term, sustainable, profitable growth. Accordingly, we remain confident on delivering on our expectations for the current financial year."

After collapsing 93% from over 200p to 15p in 2011, Cook staged a spectacular recovery under previous boss Harriet Green.

From near-bankruptcy, sales reached £8.5 billion in 2014, with pre-tax profit of £182 million, and buyers chased the shares up to 190p. Now, after a substantial sell-off since, the 100p sticks out as crucial technical support for the shares.

Up as much as 11% Wednesday to 109p, Cook shares trade on 9.5 times forward earnings. That looks undemanding, but broker Numis reckons a price of 105p is about right.

"We remain unenthusiastic about the investment merits of TCG: we believe that the basic business model continues to face structural challenges. Consensus forecasts for FY15 are for c.£350 million of EBIT."

Forecasts have been left largely unchanged, with revenue set to climb 8% to £8.5 billion next year, with pre-tax profit of £214 million, giving earnings per share (EPS) of 11.4p.

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