Thomas Cook yanks dividend after third profit warning of year

27th Nov 2018 07:10

(Sharecast News) - Thomas Cook has withdrawn its dividend as it cut its annual profits guidance for the third time this year and said bookings for the coming winter were down 3% on last year and there had been a "mixed start" to for summer 2019.The FTSE 250-listed tour operator, having only just issued a second profit warning two months ago, said annual revenues for the year to 30 September were up 6% on a like-for-like basis but that full year earnings before interest and tax were now expected to come in at £250m.This was around £30m lower than previously guided, reflecting a number of legacy and non-recurring charges, and £58m lower than the previous year due to an £88m decline in the tour operator business and a £35m improvement in the airline.Having already warned in September that the final quarter would be lower than expected as the long, hot UK summer created fiercer than usual industry competition in the 'lates' market, putting considerable pressure on margins, the final calculation was 'kitchen-sinked' with £28m of legacy and non-recurring charges, made up of a £14m write-down of historic hotel receivables, £4m of flight disruption costs and £10m of further transformation costs.Profits were recorded before including £153m of exceptionals, grouped as 'separately disclosed items', principally relating to the transformation programme and start-up costs relating to new ventures, while the number crunchers also made a £24m write-down on the prior year balance sheet as certain historic balances were considered to be irrecoverable.With free cash outflow of £148m, £294m below last year, and net debt was around £100m higher than forecast at £389m, directors decided to suspend the dividend, having paid £9m or 0.6p per share a year ago.Debt has been swelled by delayed bookings and higher non-cash items, but lenders were said to "remain supportive", with "additional flexibility" secured to enable the continuation of the current strategy and headroom for future covenant tests. The aim is also to reduce net debt over the coming few years via an increased focus on free cash generation and cost management."2018 was a disappointing year for Thomas Cook, despite achieving some important milestones in our strategy for transforming the business," said chief executive Peter Fankhauser, as he outlined some adjustments to his transformation strategy.With the newly established hotel investment fund helping towards the opening of 11 new hotels last summer, with at least 20 more planned, and a new alliance forged with online booking platform Expedia in five markets, Fankhauser said the combination of these two developments was "transforming our opportunities for growth"."Looking ahead, we must learn the lessons from 2018 and go into the new year focused on where we can make a difference to customers in our core holiday offering. We will put particular attention on addressing the performance in our UK tour operator where the challenges of transformation in a competitive environment remain significant," he said, adding that cost costs and capacity management will be key areas of focus.The group's committed airline capacity for 2019 will be reduced to "provide greater consistency in our core financials", with an increased focus on "higher quality, higher-margin hotels and destinations, with clearer processes and incentives to ensure these are prioritised through our retail and online sales network".As a result, underlying EBIT is expected to return to growth, with lower separately disclosed items, leading to "substantial progress on reported operating profit".However, Winter 18/19 tour operator bookings are down 3% compared to the past year and average selling prices down 1%. More encouragingly the airline is seeing a positive start and Summer pricing is ahead, with the UK source market appearing solid but Northern and Continental Europe more mixed.Shares in Thomas Cook, having already fallen more than 60% this year, plunged another 24% to 36.82p on Tuesday morning.Analysts at UBS noted that airline profitability came in stronger than expected, while the tour operator weaker due to high promotional activities."We believe airline earnings are at a peak and 1H19 will see a decline due to higher oil, potential lower yields and technical impact due to timing of Easter."For 2019 UBS had forecast EBIT of £289m and the wider City analyst consensus was looking for £311m. Broker Shore Capital said that SDIs were higher than its expectations of circa £125m, with net debt sharply higher, reflecting the disappointing trading performance, higher SDIs and slower start to the new year. Mixed current trading is "as expected", reflecting a hangover from the difficult lates market, though analysts took some encouragement from progress made against its strategic initiatives, including own-brand hotels, "which should lead to a focus on a smaller number of higher quality hotels with lower airline risk capacity".For 2019, the group faces fairly easy comparatives in the lates market, with around £30m of legacy costs, assuming they don't repeat, and circa £50m from previously announced improvement targets. "However, the trading backdrop is mixed and we would expect a sharp reduction to our prior 2019F EBIT estimate of £325m and the movement in year-end debt is worrying. We would expect our 2019F EBIT estimate to come down to c£250-280m," ShoreCap said.