Thomas Cook Group is a British global travel company. It was formed on 19 June 2007 by the merger of Thomas Cook AG. The company has 9.6 billion in revenue for 2018 and has over 21,000 employees and operates across 16 countries.
The company is split into 2 divisions- the group tour operator and the group airline. Thomas Cooks shares fell drastically last Friday: at one point they were down more than 60% and the company
closed the session trading down to only 5p a share, from a year high of 103.8p. We take a look at the company, what has brought it to this point and its future going forward. In 2012 the spark lit the fuse for the situation we currently see ourselves in today, with Thomas Cook, already indebted at the time, agreeing to a 1.4 billion refinancing loan. This was brought on by record losses experienced of 485 million.
Some of the reasons for this were higher fuel costs, lower passenger numbers and civil unrest at top destinations which resulted in 1,250 redundancies.
These reasons today have not really gone away and further issues have arisen with Brexit, higher levels of internet competition and large debt obligations. The company only a few months back could be cited as a good recovery play – Thomas Cook released their half year 2019 trading update and the shares promptly sank to just below 10p a share, then within a few weeks the shares managed to recover as high as 19p— during this period investors could have made a quick speculative return.
So now we are far lower, but what has prompted this large sell off seen on Friday? The answer is all to do with debt, and a further 750million needed for its survival during the winter months. This funding would come from the Chinese company Fosun, a £74.4bn Chinese investment giant that is listed on the Hong Kong stock exchange, at a cost: the dilution of existing shareholders. A proposed bail-out would see Fosun, already Thomas Cook’s biggest shareholder, control the world’s oldest package holiday firm’s tour operator arm. Fosun owns the Club Med chain and Premier League club Wolverhampton Wanderers.
The deal, if approved, will pave the way for a continuing of the business but the shareholders may choose to try and reject such a deal, which could force the company into administration. The chances of recovery are slim but there may be other bidders out there for the company that could move the stock higher, also at present the company is the second most shorted company on the UK market, when these shorts will close the short closing effect may push up the stock temporarily.
The sale of the company’s airline could be another catalyst for a price move that could provide valuable cash for the company.
It is important to manage positions once entered to make a call to take a loss with such an investment or wait for a recovery which may not happen, the fact the debt holders (banks, financial institutions etc.) could not care less if the ordinary share holder gets diluted as they will be solely thinking about the recovery of their money loaned. With an asset poor company this can be quite hard, Thomas Cook though has tangible assets such as its airline.
It is quite possible the debt holders paved the way to have Fosun enter on the cheap and for them to recover some of their investment. A high risk option would be an early purchase that could yield an average down play, this would have worked very well for a few that saw Flybe’s takeover as being undervalued. Initially the company fell to 1p only to rise as high as 6p in the week, these short term large share falls allow speculators with very high levels of risk tolerance to take a gamble and see if it pays off.
It is important to understand Thomas Cook is not a small AIM company, it is a 9.6billion revenue making business, then it can for all intensive purposes now be traded like an AIM company. Thomas Cook is unlikely to go bust very quickly, as there are so many stakeholders to account for and unlike a small AIM company that could go bust
overnight. Investors should never rely on one or two large investments, it is important to have a wide, well diversified portfolio, so that the impacts of such a future event such as Thomas Cook or Carillion will be minimal. Future Thomas Cooks/shares to watch out for.
It is clear the short tracker complied by Castilian Capital is a useful tool by investors looking to avoid shares that are being shorted.
The above are the top most shorted shares at present—a way to analyse is to look for companies that are overly indebted, have a relatively asset free business, i.e. a large amount of intangible goodwill is sign to look out for, low institutional ownership, and a share price that is in continual long-term decline. Then usually an “event” needs to occur that really acts as a trigger for the short seller to win, typically around results periods/trading updates.
Investors that hold these shares should not worry, as sometimes the shorting is only temporary but if you are concerned one strategy would be to open a short position in the company you own for your long term portfolio as a way to hedge, this should be done when perceived weakness in the stock is on the cards. As the world is changing, people are spending their money differently and there will be inevitably a good few of unlikely companies in similar situations in the future, a once highly established brand wakes up to the fact that they are no longer relevant in todays ever competitive marketplace.
If after reading this report you are concerned about other potential Carillion’s or Thomas Cook’s in your portfolio reply to for our investment team to undertake a free comprehensive review.
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