UBS upgrades Thomas Cook following 'steps in the right direction'

27th Sep 2018 14:28

(Sharecast News) - Analysts at UBS reset their expectations on package holiday outfit Thomas Cook on Thursday, upgrading the firm to 'neutral' as the broker highlighted its new management initiatives and operating model as "steps in the right direction".UBS downgraded its forecasts on Thomas Cook's earnings per share growth over 2019 and 2020 by 25% and 15%, respectively, in order to reflect flat capacity in the current year and lower margins for both the group's tour and airlines units due to increased competition.Although the broker noted that "uncertainties remain", leading it to drop its target price on the holidaymaker from 85p to 60p, UBS believed its new estimated price/earnings ratio of 7.6 times' forward earnings for 2019 "better reflects the outlook" for the company.UBS downgraded its profit estimates for Thomas Cook's airline unit following recent comments from the firm highlighting increased competition in the sector - putting pressure on yields and also noted headwinds from recent oil price increases."Inability of the company to pass through costs may lead to significant downside to profitability," said analyst Cristian Nedelcu.On the other hand, Nedelcu and his team said Thomas Cook's fourth-quarter miss over at its tour unit was simply the result of recent hot weather leading to structural overcapacity and that, going forward, the broker expects "flat to contracting capacity in the coming year, leading to a "partial recovery of profits.""In this environment, we believe the company will need to optimise its UK retail shop network - keeping exceptionals high. Furthermore, the technology platform may need improvements to compete in a growing online market."