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
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The Independent Online

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.