Interactive Investor

Thomas Cook slammed

22nd November 2017 14:05

Graeme Evans from interactive investor

A blissful summer in which Thomas Cook shares rose by as much as 39% between June and September had suggested that all was well in the City, with the recovery story overseen by chief executive Peter Fankhauser.

Unfortunately, a 9% reverse following the publication of annual results today has left investors wondering if Cook shares are now embarking on the return journey.

There's certainly plenty to think about after the company said UK margins were lower after four consecutive years of profit growth - highlighting the tough conditions that recently put Monarch Airlines out of business.

A combination of hotel price inflation, weaker sterling and increased air capacity has made the market for holidays to Spain much more competitive than in previous years, putting pressure on input costs and selling prices.

The UK business has also absorbed the costs of rising fraudulent illness claims, while it has also had to support 10,000 customers caught up in Hurricane Irma. Underlying earnings in the UK declined by £34 million compared to the strong result reported last year, even though revenues were 3% higher.

Investors will hope that Fankhauser's response to the margins squeeze at one of the company's biggest markets will be suitably robust. So far, he's already taken a hard-line approach towards illness claims, including by taking legal action against fraudsters.

The company is also rebalancing its destination mix towards more profitable destinations such as Turkey and Egypt, where tourists are starting to return after previous terrorism incidents.

In addition, efforts to step up Thomas Cook's online focus are continuing as web bookings grew by more than 25% in the last financial year and the company closed over 100 stores.

There are some signs that the strategy is starting to pay off, with UK bookings for next summer up by 2% and average selling prices ahead by 6%, mainly due to input cost inflation.

And if demand for holidays to Turkey and Egypt continues to improve, the company will be able to alleviate the margin pressures caused by the high concentration of holidays to Spain in 2016 and 2017. Bookings to Greece and Cyprus are also up significantly, following a strong summer in 2017.

Continuing strong performances in continental Europe and Northern Europe will also be crucial, but overall the City has been impressed by what it has seen of Fankhauser's strategy since taking on the top job in November 2014.

It has allowed the company to propose a final dividend of 0.6p per share, which is equivalent to £9 million. This is an increase of 20% compared to the dividend for the previous year, which was the first since 2011.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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