Thomas Cook : Travel agent for 175 years

>Strengths / Opportunities - . Europe's no. 2 player in tourism. Thomas Cook ranks among the top three operators across the major European markets, namely Germany and the UK.. Good track record of transformation plans. Between 2012 and 2016, the group lost about 2% of its customers and saw a 9% fall in sales (adjusted for divestments), reflecting multiple crises that hit European tourism and the activity’s repositioning. However, over the same period, the group managed to double its operating margin and increase its underlying EBIT by 75%.. A more comfortable financial position today, with net debt reduced £ 129m at the end of 2015-16, i.e. a net debt/EBITDA of 0.3x. The net debt/EBITDA (adjusted for cash pooling) fell to below 3x. The group is still looking to repay £ 200m on its debt by September 2018.. Entry of Fosun (Ba3/BB) into its capital since 2015. The Chinese conglomerate owns hotels alongside Club Med and Pierre & Vacances groups in Europe. Although it has no representative on the board of directors, its stake has already enabled it to make a partnership with Club Med and to develop Thomas Cook’s activity in China. . Prospective upgrade of S&P and Fitch’s ratings. The two agencies raised their outlook to positive from stable in February 2017 and could raise their rating to B+ in line with Moody's which already rates the group B1.Weaknesses/Threats - . The sector’s high cyclicality and seasonality. On average, Q4 accounted for over 40% of annual sales and more important all the annual profits. In terms of cash flow, the group burns through over £ 500m of FCF in the first half and is set to catch up in H2. Cash requirements are the highest in the October to December period.. Weak profitability overall, which leaves little room to absorb possible losses linked to geopolitical or climatic events that are difficult to predict. For example, the terrorist attacks in Egypt in 2014 and in Tunisia in 2015 accounted for about £ 20m losses annually, i.e. about 6 to 7% of the annual EBIT recorded at the time. Thomas Cook continues to reposition its offer to reduce its exposure to sensitive countries.What about the impact of Brexit? If the timetable is observed, the UK will exit the EU in March 2019. In tourism, uncertainties are based on 1/ the declining Britains’ purchasing power following the likely pound sterling’s depreciation, 2/ the disruption of air traffic as part of renegotiation of flight rights and 3/ the need to receive a passport. Thomas Cook generates 30% of its sales in the UK.Oddo recommendation - The progress made by Thomas Cook in recent years to improve its performance and strengthen his financial situation is undeniable. We believe that its credit profile is now well comfortably positioned in a "B" category. This takes into account its credit ratios (we calculate an adjusted net debt/EBITDA ratio of 4.1x on 30 September 2016 and an adjusted FFO/net debt ratio of 12%) and its profitability which is still fairly moderate to withstand the sector’s unforeseen events.We are adopting the following recommendations: - Buy & Hold on the TCGLN 2021 bonds (6.75%, € 400m), which trade at 0.8% YTC. These notes will be callable at 103.375% from 15 January 2018 and, given the group's target to trim debt, it would be logical for these notes to be targeted as priority. However, if these bonds are not repaid in the short term, they offer a better yield than the 2022 notes (for example, if they were called on 15 June 2019, yield would be 4.3%).- Neutral on the TCGLN 2022 bonds (6.25%, € 750m). These notes currently trade at 2.9% as they are priced in assuming a call in June 2019. This seems to be fair”, even in view of an upgrade in S&P and Fitch’s ratings to B+ by the end of next year and considering the current lack of visibility on the impact of Brexit in 2019.