Investment View: Sunny days for Tui but Thomas Cook still shivers

Tui is worth the risk, particularly if rain-sodden Brits fire up the PC and book

TUI travel; SHARE PRICE: 177.8p BUY

Thomas Cook; SHARE PRICE: 19p AVOID.

After an all-too-brief respite, it was raining again yesterday. But will this have an impact on consumers? How many more soggy days before, in spite of the consumer squeeze (or maybe because of it) people decide that they've had enough. Time to throw caution to the wind and splash out on a holiday in the sun.

If this happens Tui Travel and Thomas Cook could yet enjoy a better-than-expected summer season and so might be worth a gamble. But which one? These two travel firms couldn't be more different. Thomas Cook was recently on its knees and still looks wobbly. Tui, however, still appears to be reasonably fit and its recent results were rather encouraging.

After the hiatus caused by the Arab spring, people are beginning to trickle back into North Africa. Places like Tunisia (relatively stable) have been reviving as holiday destinations although people are still steering clear of Egypt. Greece (a big earner) remains a worry. The Germans not only beat the British to the sun loungers, they also spend more. But anti-German sentiment in Greece has caused them to steer clear of what had been a favoured destination. And British tourists may baulk at the unrest unfolding on their TV screens.

That said, Tui's first-half operating loss of £317m for the six months ending 31 March was similar to last year's £307m. At the pre-tax level, including financing costs and one-offs, it looked worse, with the deficit finishing £91m higher at £457m.

But there was an improvement in the second quarter and summer trading is in line. Tui is also out performing in the UK, where it is best known as Thomson. Thomas Cook's troubles are the reason, and the rain may help. Debt, at £1.18bn, basically unchanged, is still high and the company does have issues with its pension scheme.

But Tui trades at just 7.5 times forecast full-year earnings, with a prospective yield of 6 per cent, which is twice covered by earnings, most of which come in the second half.

Bookings from most of the group's markets look relatively healthy, considering the economic backdrop, with the notable exception of France. What is more, it is majority owned by a German parent, Tui AG, and there remains the possibility that it might table an offer to buy out minority investors.

This should provide a floor for the shares, which are up 19 per cent in the year to date. While they don't offer as much value as they did, there is enough to like about Tui to make it worth the risk, particularly if rain-sodden Brits get sufficiently fed up to fire up the PC and book.

Thomas Cook, however, is a different story. Anyone who gambles needs to obey a strict rule: only bet what you can afford to lose. An investment in Thomas Cook has to be classified as an out-and-out gamble right now. But is it a worthy gamble?

The company has signed a new financing deal so it appears to be out of imminent danger. At the end of last week it unveiled a sale and leaseback deal involving seven Boeing 757 aircraft and six Boeing 767s with an agreement in principle over two more of the latter. This should realise about £185m in cash for the company, which it badly needs to provide some breathing room as it grapples with a debt mountain. But its shares still fell 10 per cent yesterday ahead of the shareholder vote on the deal because of worries about the group's financial position if it doesn't go though. Which speaks for itself.

And there is a catch, and it's a big one. Sale and leasebacks were all the rage in the City a while back. Retailers with big property portfolios were either encouraged to do them or (like Sainsbury's) found themselves battling against attempts to force such a move.

Some of those retailers who did take the plunge came to badly regret it when the recession hit home. Shareholders enjoyed some short-term gains from the deals, which released lots of cash. But the companies involved suffered long-term pain as they struggled to meet the terms of the leases they'd been left with.

Of course, these are aircraft not shopfronts, but the companies buying Thomas Cook's planes aren't charities. Guggenheim Aviation Partners and Aircastle Advisor wouldn't have agreed unless there was considerable upside in it for them. And there is: the deal will result in a £10m yearly hit to Thomas Cook's earnings.

Those earnings weren't looking all that good even before the sale and leasebacks. UK bookings for the summer season were down 9 per cent, ahead of capacity reductions of 13 per cent, even though average selling prices were up a bit.

Trading in western Europe, and notably in France, has been poor while in northern Europe bookings fell 6 per cent. The seasonal loss from operations for the six months to the end of March widened to £262.7m from £165.8m. With net debt of £1.4bn the cash from the sale and leaseback is helpful, but small beer. Thomas Cook is not a gamble I'd be interested in. Avoid.

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
Friends is celebrating its 20th anniversary this year
tvSeries celebrates 20th anniversary
News
news
Life and Style
Jack Cooksey goes for the grand unveiling - moments before dropping his new iPhone 6 on the floor
iphone launch
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Liam Neeson said he wouldn't
tv

Liam Neeson's Downton dreams

Sport
Yaya Touré (left) and Bayern Munich’s Spanish defender Juan Bernat
football
Arts and Entertainment
A spell in the sun: Emma Stone and Colin Firth star in ‘Magic in the Moonlight’
filmReview: Magic In The Moonlight
Sport
A 'Sir Alex Feguson' tattoo
football

Arts and Entertainment
Ben Whishaw is replacing Colin Firth as the voice of Paddington Bear
tv

Thriller is set in the secret world of British espionage

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Audit Manager Central Functions

To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...

Credit Risk Audit Manager

Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week