FT Viewpoint29 Nov 2018 10:31
I bought back in at 34p this week as I felt this was way overdone and nothing below from the FT overly concerns me. In short, it was a shit year, two customers died in Egypt, they cleaned up their accounting practices and their debt went up a bit but.....the company is still making a profit of £250 Mn and there is reason to believe 2019 will be a better year.
However, Thomas Cook’s latest warning — which comes just two days before it reports full-year results — is more worryingly illogical than meteorological. Underlying operating profit will fall further, to £250m — but almost all the additional £30m hit is from a management decision to book “legacy and non-recurring charges” against earnings, not as separately disclosed, or exceptional, items. There was “no material change” to trading. And this raises two questions that may leave some hot under the collar.
First, why was this done now? In its statement, Thomas Cook said it wanted to lower the number of separately disclosed items in its accounts so that reported operating profit — not the underlying number with charges stripped out — became more meaningful, and a focus for managers. All very commendable, but those charges were one-offs: a write-off of amounts owed by hoteliers from years ago, the cost of disruption after rival airlines went bust, and bills for closing UK shops. They could have been classified as exceptionals this time round. But the fact they were suddenly reclassified two days before the results suggests disagreement on the part of the finance director or the auditors.
Second, if these were one-offs, why did the shares fall 25 per cent? Some other numbers must have been in the red zone. Net debt was seemingly one of them: at £389m it was £100m more than UBS had forecast and 45 per cent higher than consensus estimates — a disparity the company said was “due to delayed bookings”. A free cash outflow of £148m was also disclosed, partly reflecting “a working capital impact from the slow start to bookings”. Thomas Cook reassured investors that “lenders remain supportive and we have secured additional flexibility”. But, as Citi analysts suggested, the fact it had to do so will mean shareholders “remain concerned about further working capital weakness”.
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