LONDON -- The recent turnaround story at Thomas Cook Group (LSE:TCG) has been pretty spectacular. The shares crashed in 2011 from 2 pounds to 15 pence, and the press was filled with stories speculating on whether the company would go under.
The shares were still trading as low as 20 pence as recently as last November. However, with a new management team in place and a credible recovery plan already bearing fruit, the shares have soared in the last six months.
Today, after the company issued its latest half-year results and unveiled a 1.6 billion pound refinancing plan, the shares jumped a further 9% to 157 pence.
Overladen with debt
The story of how Thomas Cook got into trouble in the first place is, sadly, a familiar one. Before the financial crisis, it was trigger-happy on the acquisition front. Consequently, it was far too indebted to cope with any significant downturn in its business.
Despite a number of disposals, the company still had net debt of 1.2 billion pounds as of March 31, 2012. Today's refinancing plan sees this reduced by raising 400 million pounds from investors and reorganizing its borrowings so they do not have to be repaid as quickly.
On the equity front, 120 million pounds is being raised by a placing of new shares at 137 pence, but the bulk of the money will come from existing shareholders, who can subscribe for a "two for five" rights issue at 76 pence. Turning to debt, 500 million euros will be raised from bonds that mature in 2020, with the balance coming from a new revolving loan and bonding facilities expiring in either 2015 or 2017.
Of course, there is little point refinancing your company if underlying trading is not improving. Thomas Cook's half-year results show some decent progress on that front. Underlying profit improved by 60 million pounds, with gross margins increasing by just more than a percentage point. Free cash flow came in nearly 200 million pounds higher, thanks to better working-capital management.
Despite this, the company still posted a 300 million pound loss for the period on 3.2 billion pounds of sales. With two-thirds of Thomas Cook's revenue coming in the second half of its financial year, this is an exceptionally seasonal business. Summer bookings are running just ahead of last year, though, despite a capacity reduction of 7%. Selling prices are up 4% in the U.K. and 1% in Continental Europe. Thomas Cook says it has sold 60% of its capacity for this summer, 2 percentage points ahead of where it was last year, and this should bode well for selling prices for the remainder of the season.
The rights issue and placing will add about 500 million new shares to the 900 million already trading, meaning the company should be valued at about 2 billion pounds once the shares begin trading "ex rights" in early June. With just more than 100 million pounds in post-tax profits forecast for the year to September 2014, that looks rather pricey, but you would expect to see further improvement in profit margins going forward.
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