Thomas Cook and TUI shares fall on Credit Suisse downgrade

11th Jan 2017 09:01

(ShareCast News) - Thomas Cook and TUI slumped on Wednesday after Credit Suisse downgraded its rating on the travel stocks.Credit Suisse cut its rating on Thomas Cook to 'neutral' from 'outperform' and lowered the target price to 87p from 88p, citing worries for the company's outlook in 2017 and 2018.The first concern includes the prospect of falling real wages and the highest level of fuel and foreign exchange inflation since 2009 in the UK, which represents 46% of 2017 group earnings before interest and tax (EBIT)."This is a concern as holiday volumes are 74% negatively correlated with such inflation."Credit Suisse lowered its 2018 UK margins for the company by 50 basis points to 6.3% and as a result, it expects earnings per share will decline 8%.The second concern is Germany, which accounts for 22% of 2017 EBIT, where airline capacity growth has accelerated to 6% and low cost carriers are present on just 20% of key sunny and beach routes, compared to 80% in the UK."In contrast to TUI we don't have the same concerns on cash flow generation (FCF yield 9.6% 2017-20E vs 4.4% at TUI) plus highlight Thomas Cook's superior margins and returns," Credit Suisse said.The financial services group downgraded TUI to 'underperform' from 'neutral', saying it also sees exposure to a tough outlook in the UK and Germany, the company's two largest markets."This coupled with a lack of cashflow (average 2017-20E free cash flow yield 4.4%) and 50% premium to Thomas Cook (now rated neutral) leads us to downgrade to underperform," Credit Suisse said.Despite €0.8bn of disposal proceeds consensus forecasts for 2017 net debt have risen €1.2bn over two years, it said.Credit Suisse also believes reported hotel and cruise performance is "flattered". Since 2014 more than half the growth in hotel EBIT has accrued to minorities. Cruise return on invested capital (ROIC) was stated as 21% in 2016, but Credit Suisse said it doesn't view this as a true measure of returns due to joint venture accounting and noted that TUI Cruises all-in ROIC was only 9%.Shares in TUI fell 4.87% to 1,132p and shares in Thomas Cook dropped 4.47% to 84.50p at 0944 GMT.