Thomas Cook suffers results day horror

Holidaymakers have had plenty of reason to delay booking their summer breaks this year, and Thomas Cook has felt the brunt. Terrorist attacks in Tunisia, Turkey and Egypt have already scared off many tourists, and now we hear that EgyptAir Flight MS804 from Paris to Cairo is missing. It's partly why Cook shares have collapsed by 20% to a three-year low Thursday.

Cook's chief executive Peter Fankhauser warned in March that many of us were leaving it later to book this year - about two weeks, we’re told. And the travel operator had already switched flights away from trouble spots to the perceived safety of the Canaries, Balearics, the Spanish mainland, USA and even Cuba.

But bookings for this summer are down 5% and pricing is no better than last year. Strip out Turkey - Cook's second largest market last year - and bookings are up 6%. Strip out Turkey, Tunisia and Egypt and they’re up 13%. But the Turkey "stay away" has meant big losses at the German airlines business Condor and terror attacks in Belgium have hit demand there.

Yes, the shift to safer destinations meant revenue for the six months to March edged up nearer to £2.7 billion, but Cook still made an underlying operating loss of £163 million, only a little better than last year and City expectations.

A 3% drop in UK bookings is bad news, too, and Fankhauser admits this will further damage profits.

"Taking into account anticipated foreign exchange translation gains, we expect underlying EBIT [operating profit] for the full year to be between £310 million and £335 million," he says. "We continue to expect to pay a dividend in respect of the current year's earnings."

Cook reckons consensus estimates for 2016 had pencilled in profit of £310-£359 million, but analysts have scrambled to downgrade forecasts. Numis Securities now expects a much smaller increase in operating profit this year to £316 million, giving pre-tax profit of £186 million and earnings per share (EPS) of 9.9p.

It remains unclear whether the fear of terrorist atrocities will convince holidaymakers to stick closer to home this summer. It’s bad news if they do, but even if they don’t, Cook must remain clever with capacity. It must also keep driving its long-haul business where bookings have grown an impressive 19%.

At 72.5p, Cook shares trade on a modest 7.3 times forward earnings. It also continues to promise a dividend this year for the first time since 2011. But the valuation multiple reflects the scale of potential threats to profits in the months ahead. A plunge below technical support at around 80p Thursday only heightens concerns here.

Numis analyst Wyn Ellis is not impressed: "We remain unenthusiastic about the investment merits of [Thomas Cook]: we believe that the basic business model continues to face structural challenges."

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